Tim Grant for TheRepublic.com writes: Teenagers often get their first taste of financial independence by earning a paycheck from summer jobs or working for an employer after school — waiting tables, running cash registers or washing dishes in a restaurant.
While children of legal working age may not always be prepared for the responsibilities of reporting their income to Uncle Sam, the good news is that in most cases they are not likely to make enough money to owe any federal income tax.
"For 2013, children can make up to $6,100 without owing federal taxes, because that amount is equal to the standard deduction they can take," said Howard Davis, president of the Davis, Davis & Associates accounting firm in Pittsburgh.
. He said when young workers fill out their W-4 form for a new job, they also should tell their employers not to withhold any federal taxes.
"If you don't have any federal income taxes withheld to begin with, the child does not have to go through the trouble of filling out a federal tax return to get it back and the child gets the use of the money during the year," Davis said.
Tax consultant William Richardson said parents should encourage children to use at least part of their earnings to open and fund a Roth IRA where it can grow tax-free for many decades to come.
"There's a big difference between savings that grows tax-deferred, like a 401(k), and something that grows tax-free, like a Roth IRA," Richardson said. "If you have a child age 18 who made $2,000 over the summer, they are allowed to fund a Roth IRA for 2013 to the lesser of their earned income or the Roth IRA contribution limit, which is $5,500.
"If the parents or the child have the ability economically to fund the IRA with that $2,000 and keep the money in the account until retirement age for 50 years, can you image through compounding how much tax-free income you can accumulate with just that one contribution?"
Teenagers don't always earn money working for someone else.
With the job market being as tight as it is, many youngsters are more often working for themselves as babysitters, lawn maintenance workers or even designing websites on a freelance basis. But even that money must be reported on tax returns if the earnings exceed $400, according to the Internal Revenue Service.
"You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes," according to the IRS website. "Your employer usually must withhold these taxes from your paycheck.
"Or, if you are self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system."
For federal tax purposes, a person is treated as self-employed: if he or she is in the business of delivering newspapers, if the majority of income stems from sales rather than the number of hours worked, or if a person works under a written contract stating that the employer will not treat him or her as an employee for federal tax purposes.
If children do not meet these conditions and are under age 18, they are usually exempt from Social Security and Medicare tax.
Accountant Alex Kindler said teenagers who work during the summer or after school also should save their pay stubs.
"It's not uncommon for employers to forget to send them a W-2 at the end of the year," Kindler said.
Also, teenagers who work for tips should remember that tips are taxable.
"The simplest way to keep track of tips is to maintain a daily tip log," he said. "Typically a tip log is sufficient documentation for the IRS. But it's highly unusual for students to maintain one. It's usually out of ignorance. They just don't know any better."
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