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5 tax considerations for young workers and their parents

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If you're a young person with a summer job, be aware of the tax implications. (Photo by Andrea Piacquadio)

Your teenager has a summer job lined up, and you're thrilled. So is your youngster.

But before the young worker heads off for the first day of gainful employment, it's a good idea to consider the tax implications.

Here are five common tax issues that young workers, and their parents, face.

1. The teen likely will have to file some sort of tax return.
The U.S. tax code is wonderfully egalitarian when it comes to filing. Anyone who makes a certain amount of money, regardless of age, generally has to file some type of tax return.

For the 2022 tax year, a Form 1040 is required when an individual makes at least the standard deduction for the tax year. This year that's $12,950.

If you're a parent thinking you can just tack your child's earnings onto your annual filing, think again. That kiddie tax option is allowed only for some youngsters' unearned investment income.

Earned taxable income must be reported by the actual earner, even a young dependent, regardless of age.

Many teenagers won't make the nearly $13K return filing trigger, so they won't have to worry about meeting the annual April tax deadline.

Unless the youngster is self-employed and earns more than $400.

2. Self-employment amounts have a lower tax filing trigger. 
Yep, a teen's tutoring or pet sitting or go-to gopher endeavors likely will hit that $401 level.

And that will mean enterprising youngsters will have to file to pay self-employment (SE) taxes even if they don't make enough over the next few months to technically require a 1040.

There's a great temptation to ignore this filing. Don't.

First, your child will be breaking tax law. Second, this filing will go toward the youngster's eventual Social Security and Medicare benefits.

3. Keeping good records from the get-go will help.
As adult taxpayers who've been filing for ages know, meeting tax requirements is easier when your records are in good shape. This is a good lesson for young earners to learn

It's particularly important for those who were their own bosses during the summer. The young entrepreneur will need to track income and expenses to determine their potentially taxable earnings.

A review of Form 1040's Schedule C can give self-employed filers of any age an idea of what the Internal Revenue Service wants reported, as well as what can be claimed as expenses that will reduce gross income. The aforementioned self-employment taxes will be reported and tax due figured on Schedule SE.

Keeping good track of income and expenses will make for a smoother filing next April by the young bosses.

Plus, accurate documentation will help the young workers determine whether they should pay estimated taxes. These are self-employed workers' equivalent to payroll withholding. Generally speaking, any taxpayer who expects to owe the U.S. Treasury more than $1,000 must make estimated tax payments, usually on a quarterly basis.

4. Withholding taxes will cut into summer wages. 
There's less tax work for young employees who are working for wages. The key tax consideration in these cases come when at the job's start.

The young worker will be asked by your employer to complete a Form W-4. This information is what the boss will use to determine how much tax to withhold from each of the new employee's summer paychecks.

If you earn more than the $12,950 return filing trigger amount mentioned earlier, taxes will be collected at the 10 percent rate on your earnings. Next January, you'll get a Form W-2 with details on just how much tax was withheld.

You'll use that W-2 to file your Form 1040. If too much tax was withheld, you'll definitely want to file a tax return because that's the only way you'll get your money back from Uncle Sam.

5. Take advantage of earnings to open an IRA. 
Young workers, like most workers of any age, likely will want to spend some of their summer earnings on recreational pursuits. I'm not a parent, so I'll leave it to families to discuss just how much the youngster can blow on personal treats.

But I will suggest that during that discussion, the young worker is encouraged to put at least some money into a retirement account. I know, even as a non-parent, that it's sometimes difficult to convince young people that one day they'll be old and will need such savings.

A Roth IRA usually is the best option for young workers. The after-tax contributions, even if the youngster didn't make enough to owe taxes, will grow tax-free for decades. The maximum contribution amount for 2022 is $6,000 or as much as the young worker earned.

One way to make the IRA option more appealing is to jumpstart the contributions. Anyone — mom, dad, grandparents or other relatives, or even unrelated friends — can help by giving the young worker a nontaxable cash gift to fund the new Roth IRA. That way, the young worker gets to keep all his or her summer job cash.

Then, after the newness and excitement of working wears off, the young worker can make future retirement account contributions with continued earnings.

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