“You didn’t tell me how MUCH they would take out in taxes.”
Expect to hear those words from exasperated teenagers or college students over the next few weeks as they set aside their calculators and toss their textbooks to start summer jobs.
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For many young workers, this will be their first time getting acquainted with their rich uncle. His name is Uncle Sam.
Whether running a cash register, busing tables, bagging groceries or pitching in at the family business, most young workers will have to deal with W-4s and other tax paperwork when they report for duty. That’s only the beginning if part of their summer income comes from tips or they’re self-employed and expect to be pulling down big bucks through their lawn care service.
Like it or not, summer provides an opportunity for young workers to get schooled on taxes. Do them a favor and go over their pay stub so they’ll become familiar with such things as withholding, Social Security and Medicare.
Here are some of the important issues that summer workers and parents need to know, keeping in mind that the tax laws have a befuddling array of caveats that could be best answered by going to the IRS website, www.irs.gov.
• Income thresholds. The 2012 standard deduction for single taxpayers is $5,950. That means that a youth who is listed as a dependent of another taxpayer can earn up to that much money and not have to file a federal tax return. Be sure to check state rules, however, because thresholds could be lower.
If your young worker is self-employed — including jobs such as lawn mowing and baby sitting — the Internal Revenue Service sets the income bar much lower. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax to cover your benefits under the Social Security system. Still, you may end up owing little or no taxes come April 15 because your earnings are so low.
• Get to know Form W-4. When starting a job, employers will require you to fill out Form W-4. This is used to determine the amount of tax that will be withheld from your paycheck. The W-4 can be confusing, so it’s often best to take the paperwork home so it can be filled out correctly rather than under pressure at the company’s human resources department.
The California Society of Certified Public Accountants recommends that if you are certain that a young employee’s total summer earnings won’t incur income taxes, he or she should file a W-4 claiming an exemption on line 7 from federal income tax withholding.
“That avoids having to file a return to reclaim tax payments the following year,” the organization said.
• Working in the family business. This might provide some tax relief for parents as well as their employee. For example, if parents put their son or daughter on the payroll for the summer, the parents can deduct the wages, said Julie Welch, a tax expert with Meara Welch Browne in Kansas City. And, depending on the age of the child, the parent also can avoid some payroll taxes for Social Security and Medicare.
• Don’t forget about tips. For waiters, bartenders and other summer workers who earn tips, be aware that you’ll still have to pay tax on those amounts.
According to the IRS, if you receive tips of $20 or more in a month, the amount needs to be reported to your employer, who is then required to withhold tax for whatever amount of tips you report. This is usually handled by withholding tax from your wages.
• Special rules for ROTC students. Subsistence allowances for food and lodging paid to ROTC students participating in advanced training programs are not taxable. However, active duty pay — defined by the IRS as pay received during summer advanced camps — is taxable.
• Study up on savings breaks. While many young workers will be using the summer earnings to help pay for college or perhaps a car, don’t overlook the breaks provided by the IRS of opening either a Roth or traditional individual retirement account. As long as there’s earned income from a job — regardless of your age — you’re eligible to open a retirement account.