It’s summertime and we often get asked about how to handle taxes and forms for a child’s summer job or first job out of college. We’re recapping some tips below:
Completing Form W-4 for summer jobs:
When you child begins their summer job, their new employer will require them to complete a Form W-4, Employee’s Withholding Certificate. The W-4 instructs the employer how to withhold income taxes from your child’s paycheck. For your kids working over the summer consider claiming “Exempt” from withheld federal income taxes on their paychecks. The IRS allows a taxpayer to claim an exemption from federal tax withholdings if they had no federal income tax liability in 2021 and they expect to have no federal income tax liability in 2022. Assuming that your child expects to earn only a small amount of pay this year and did not have a tax liability the prior year, your child can write “Exempt” on line 4(c) of the Form W-4 and no federal income taxes will be withheld from their pay – leaving a larger weekly net paycheck for your child.
Completing Form W-4 for recent college grad’s first job:
When you complete the Form W-4, your employer will withhold income taxes based upon the assumption that earnings will be for an entire calendar year. However, recent college grads beginning full-time employment soon after graduation will only be working a partial calendar year their first working year. The IRS income tax withholding tables are based upon a full year of earned wages. For recent college grads working a partial year, most likely more taxes will be withheld than needed from their weekly paycheck, which may result in a large tax refund the following spring when the tax return is prepared. Instead of waiting until the following spring to receive the refund for the over withheld taxes, employees working a partial year can submit a request in writing to their employer to have less taxes withheld from their weekly paycheck (leaving a larger net take home pay in each paycheck). This “part-year tax withholding method” statement prepared by the employee and given to their employer should include the following:
- The last day of your employment in the calendar year,
- That you use the calendar year for your tax return reporting, and
- That you will be employed no more than 245 days (from all employers in the calendar year)
Is your child being paid as an independent contractor?
Although most employers pay their summer hires as employees and report the income earned and taxes withheld on a W-2, occasionally a company will pay their summer staff as independent contractors issuing a 1099-NEC to your child at year end. When working jobs in sales, social media, and freelance, workers are frequently paid as independent contractors. And although your child’s total income earned for the summer may not require any income tax to be paid, they would be responsible to pay “self-employment” taxes on this income if they are paid more than $400. How can you determine if the employment is as an independent contractor (1099-NEC) or as an employee (W-2)? If social security taxes and Medicare taxes are being withheld from pay, then your child is hired as an employee and will receive a W-2 at year end. However, if no taxes are being withheld, then payment is made as an independent contractor and your child will need to pay self-employment taxes at year end. Be aware, if independent contractor status, then your child will owe 15.3% of their pay for self-employment taxes even if no income taxes are owed and your child will need to file a tax return at year end to pay this tax.
What about Venmo and PayPal sales?
If your child is selling or re-selling items through the internet and receives a 1099—K from Venmo or PayPal at year end, this would be considered self-employment income as well. Additionally, be sure to track the costs of your child’s “business expenses” such as costs of “inventory” being sold in your child’s business plus other selling expenses (web hosting, advertising, postage, etc). These business-related costs are allowed to be deducted from income received. And taxes to be paid are based upon the Net Income of the business (collections less related business costs).
Take advantage of Roth IRA Contributions!!
Even if your child has only a small amount of earned income from a summer job, they will still be eligible to contribute to a Roth IRA under their name. The contribution allowed is limited to the lesser of the child’s earned income and $6,000. The major benefit of funding a Roth IRA early in your child’s career is that the earnings in the Roth IRA grow tax free over your child’s lifetime. The Roth IRA contribution can be funded by parents (or grandparents) as a gift to your child and doesn’t need to come directly from your child’s bank account. And remember, the dollars must be funded into a Roth IRA under your child’s name.