Tips for students with summer jobs
School is almost out and students are hunting for summer jobs to keep them occupied and line their pockets with some extra green.
While most students would never give it another thought, summer jobs can often create unexpected tax issues for them.
So here are a few tips for students who are pulling in some extra cash this summer. If nothing else, look at it as representing an opportunity for students to continue their education by learning about the tax system, such as it is.
You see, for a regular job, your employer withholds these employment taxes (i.e., Social Security and Medicare taxes) from your paycheck and matches them. If, however, you earn $400 or more from self-employment, you have to pay these taxes yourself by paying what is called the self-employment tax.
Self-employment tax pays for benefits under the Social Security system that are available for self-employed individuals the same as they are for employees that have taxes withheld from their wages.
The self-employment tax is figured on Form 1040, Schedule SE, Self-Employment Tax, and it is important to note, they must be paid even if no income taxes are owed.
Finally, here are some tax planning ideas for parents.
First, did you know that hiring your children can lower your own tax bill as well?
No FICA tax is due if sole proprietors or husband-wife partnerships hire their kids who are under 18. This is also true if they work for a parent's one-person LLC that is considered disregarded for tax purposes.
Nor is federal unemployment tax owed on their wages until the kids are 21 years old.
Also, compensation to children is deductible by the parent’s business, so such pay reduces the parents' income and self-employment tax liabilities.
And lastly, if your child (or grandchild for that matter) is working this summer, you may want to consider contributing to a Roth IRA this year for the child. You can contribute up to $5,500 (limited to the amount of earned income the child actually makes).
By doing this, you can help your child get started on building a nice retirement nest egg for which they will be grateful.
For example, one $5,500 contribution made at age 16 to a Roth that earns 6.5% per year will be worth almost $132,000 by age 65 and even better, just over $182,000 by age 70.
Just think about what could be there if contributions are made each year that the child works!
A reminder, though, any contributions made are considered gifts to your child, so count toward the $14,000 annual gift tax exclusion you are allowed to make without filing a gift tax return ($28,000 if your spouse participates).
So students, enjoy your break from school and by all means earn as much as you can, but be aware that a day of reckoning with the tax man may be in the offing!
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