It may not be the first question parents have when their teenager is signing up for that job as the pool lifeguard, or working at the mall, or running a babysitting service, but come tax season, there are a few things both working students and parents need to know about how and what to claim on their tax returns for that summer income.
For teens
First, there is no minimum age requirement for filing a tax return. There is, however, a standard deduction limit. If a working student makes more than this amount, they will need to file a separate income tax return—check the IRS website for the latest information on this amount, as it can change year to year. There are also other filing requirements regarding investment dividends and interest—considered “unearned income”—that apply to teenagers. When the annual total of unearned income exceeds a certain amount, then a return must be filed.
At the start of their job, a teen will be required to fill out a W-4, so their employer can make the appropriate tax deductions from their paychecks, like state and federal income tax. Check with a tax professional, but it is often a good idea for a teen to claim zero exemptions to ensure enough is withheld and they don’t end up owing the IRS come tax season. If the income from their summer job is less than $12,950 for tax year 2022, they should get their income tax withholdings back as a refund.
When a high school student works a job that qualifies them as self-employed, they will need to file a tax return if they earn more than $400. They’ll need to file a Schedule C if they plan to deduct expenses like mileage or equipment. These self-employment tax rules also apply if the teen works for an employer as an independent contractor. In this case, they would receive a Form 1099 if they made more than $600. Depending on how much they made during the summer, they may not owe federal income tax, but they will still owe self-employment tax on a quarterly basis.
There are a lot of self-employment exemptions to consider, even for teens. For example, the IRS considers teens who provide babysitting and lawn-care services as household employees, and those under 18 are not subject to Social Security and Medicare taxes. This same exemption applies to teens under 18 who work as newspaper carriers, distributors, and vendors.
A dependent teen with a job requiring a W-2 and with no investment income, usually files a Form 1040 EZ, Income Tax Return for Single and Joint Filers With No Dependents. If they received multiple sources of unearned income or ran their own business, the tax implications are more complex and a tax professional or tax software should be consulted.
For parents
Parents often wonder as their teen gets older and gets a job if they can still claim them as dependents, if any of their income—earned or unearned—is reported on their own tax returns, and if they can still claim the child tax credit.
Any earned and unearned income made by the teen is claimed on the teen’s tax return, not on the parents’. Parents can claim a teen is dependent, regardless of how much income the teen makes, as long as the parents are still paying for and providing more than half of the child’s support, including gifts, entertainment, food, shelter, clothing, medical expenses, school expenses, purchasing and maintaining a vehicle, and any other forms of transportation. The teen also needs to live with the parent(s) for over half the year. If a parent claims the child as a dependent, the teen cannot claim themselves as an exemption. This is true even if the parents do not claim the teen as a dependent but still provide for over half of their support.
As for the child tax credit, parents can claim any dependent child under the age of 19 for the credit, even if the child is working and paying taxes.