Get to know your W-4
06/14/2013 5:13 PM
06/14/2013 5:13 PM
Most teenagers mowing lawns, sacking groceries, babysitting or toiling away at other summer work know the importance of showing up on time, being responsible and having a good attitude.
Far fewer know about the W-4, Schedule SE, and all the other wonderful idiosyncrasies of the federal tax code.
Millions of young workers in their first job — either on a company’s payroll or as a fledgling self-employed business tycoon — will have tax issues to consider this summer.
The good news first: Many summertime workers won’t owe the IRS a dime and won’t need to file a tax return next year. Their income will fall well below filing thresholds.
Still, they will have employment paperwork to fill out.
Employees on a payroll are required to fill out a Form W-4 so their employer knows how much to withhold for federal and state income taxes. Tax experts generally recommend that kids working just the summer claim zero exemptions on line 7 of the form.
It gets trickier for teens juggling more than one summer job. In those situations, the IRS recommends making sure all their employers are withholding an adequate amount of taxes to cover their “total income tax liability.”
For help, go to the Internal Revenue Service website atwww.irs.gov
and check out the withholding calculator for the W-4.
Self-employed youngsters are required to pay self-employment taxes on Schedule SE if their profits exceed about $400.
Waiting tables or working in other jobs that generate tips from customers? Uncle Sam considers those tips taxable income. Workers making more than $20 in any month in tips must report that income to their employer so taxes can be calculated and withheld.
Besides getting to know the W-4 and other employment paperwork, scrutinizing summer pay stubs can provide some invaluable lessons for first-time workers. For example, know the difference between gross income and net income, and gain an understanding of taxes paid for Social Security and Medicare. Watch for state and local taxes too.
Finally, here’s an idea on what to do with that hard-earned summer job money: Open a retirement account.
Traditional individual retirement accounts or Roth IRAs don’t come with any age restrictions. All you need is earned income from a job to begin reaping the benefits of long-term savings. (Of course, opening a retirement account would trigger the need to declare income on a tax return.)
An IRA might not be quite as cool as saving for a car, but it will give young workers an early appreciation of how to use the tax laws to their advantage.