With the school year coming to a close, your son or daughter may be starting a summer job. Now may be a good opportunity to teach them a thing or two about taxes.
Several factors affect a student’s tax position, including the amount of anticipated annual earnings, status as a dependent and type of employment.
Their employers will ask your working children to fill out a Form W-4, which is used for computing income tax withholdings. The information provided on this form will affect the amount of taxes your children will owe next April or the size of their refunds. If a child will not earn enough to create an income tax liability, claiming exempt status on the Form W-4 may even eliminate the necessity of filing a tax return for 2014.
To qualify for exempt status, your student must have had no income tax liability in 2013 and also expect no income tax liability for 2014. However, exempt status does not apply to Medicare or Social Security taxes, which are still withheld and reduce your student’s take-home pay accordingly.
A student returning to the same place of employment as last summer may be required to complete a new Form W-4. Although W-4s usually remain valid until an employee wishes to change any information, if an employee claims exempt status from federal withholding, a new W-4 must be completed for the employer each calendar year.
Full-time students under the age of 24 are eligible to be claimed as dependents on their parents’ income tax return. For this purpose, children who attend school full-time during any part of five calendar months during 2014 are considered full-time students for the entire year. So, they may be full-time students even if 2014 is their graduation year.
Students may not need to file individual returns if they meet certain income thresholds. For 2014, a dependent child will not be required to file an individual income tax return if the child meets all of the following requirements:
➤ Is employed
➤ Earns less than $5,850
➤ Has less than $1,000 of unearned income, such as interest, dividends or capital gains
➤ Has gross income – earned plus unearned income – of no more than $6,200
However, if the student does not claim exempt status on Form W-4 and any amount of federal income tax is withheld from the student’s earnings, it will be necessary to file a return for 2014 just to claim the refund.
It is also important to understand the employment classification for the work the student is being hired to perform. Form W-4 filings pertain only to an individual hired as an employee.
Students hired as independent contractors are considered self-employed. This situation often occurs within service industries providing odd jobs, such as mowing lawns or babysitting. At the end of the year, instead of a W-2, self-employed individuals usually receive a Form 1099-MISC, which will not include any taxes withheld from earnings since withholding is not required of self-employed individuals.
Regardless of whether your student receives Form 1099-MISC, anyone earning a profit over $400 from a self-employed summer job is required to file an income tax return and pay the self-employment tax of 15.3 percent, in addition to any income taxes. To determine the amount of profits from self-employment, deduct any qualified expenses incurred that are directly related to the jobs performed from the gross income earned during the year.
Several unique rules frequently apply to students’ summer positions. For example, it is important to remember that all tips received, such as through a wait staff position, are taxable, and any tips received in excess of $20 per month must be reported to the employer. This reporting requirement ensures that the proper amount of tax is withheld not only from hourly earnings but also from tip income.
If a student is in a U.S. armed forces training program, such as ROTC, active duty pay while in training is fully taxable. However, certain allowances provided for food and lodging are not.
While students’ tax positions can vary based on specific circumstances, understanding the tax implications of summer jobs can help your students plan their 2014 tax situation and provide them with valuable tax knowledge that they can carry forward into their future careers.
©2014 CPAmerica International