Tax Tips for Working Teens, Summer Interns & Their Parents

Howard Fiske writes: Whether your teenager takes a retail or restaurant job, or works as an accounting or law intern this Summer, be aware that if it is a paid position there are going to be tax filing requirements governed by their age, filing and dependency status, as well as earned and unearned income levels.

Key Point: Depending on the age of your child and the amount of the cash involved in a Summer job, there might be additional tax consequences like the “Kiddie Tax”! This tax law was passed to prevent parents from shifting income to their children in a lower tax bracket.

When it comes to filing to federal income tax returns, generally the rules with respect to a dependent child are that a return must be filed if:

• -the dependent has over $1000 of unearned income,
• -or over $6200 of earned income for 2014.

Otherwise no individual return for the dependent is required. The same applies to a son or daughter 24 years or older if they make more than the personal exemption of $3950 for 2014. If your son or daughter is 24 years old, it doesn’t matter if they are a student or not – they can’t be claimed as a dependent and have to file individually anyway. Also, if your teenager or full time student is filing his or her own tax return, and can be claimed as a dependent on someone else’s return, they cannot claim their own personal exemption.

Being realistic, your teenage Intern may not earn very much from their Summer job, but may still want to file a return if their employer withheld income tax from their paycheck, and they want to get those taxes refunded. Discuss with your teenager how to fill out a W-4 form because an employer is required to withhold taxes. Even if they are a full time student, your teenager is not automatically exempt from tax, especially if certain income levels are reached. They can write “Exempt” in box 7 on the W-4 form if they are an unpaid intern, or if otherwise applicable. They would generally have to have had no tax liability the previous year (2013) and expect none in 2014. Remind your teenager that employers must still withhold Social Security and Medicare taxes from their paycheck, unless, of course, you the parent are their employer and an unincorporated business.

Remind teens that if they receive tips, these are considered income and are taxable. Also, if they earn money doing odd jobs this summer, like baby-sitting, pool cleaning or lawn mowing, the net earnings they receive from self-employment are subject to self-employment tax if $400 or more. Urge your teenagers to keep good records of the $$$ they earn! The self-employment tax rules apply no matter how old you are.

The current job market for some students and graduates is tough, and the family business may be their only job option right now. Employing your son or daughter may generate some tax savings. Regardless of how the family business is structured, parent-owners may be able to turn some of their high-taxed income into tax-free or low-taxed income by employing their children. The work done must be legitimate, and the amount that the business pays them must be reasonable in order for the wages to be deductible.

Unlike unearned income, the amount of earned income is not subject to limits and the rate of tax is your child’s own rate. Your child or teen can have unlimited earned income from work without worrying about the Kiddie Tax. However, as you will see below, things get a bit more complicated if there is a mix of earned and unearned income.

Kiddie Tax Considerations

A child will be subject to the “Kiddie Tax” on unearned income in excess of $2000, until the year the child turns 18 regardless of earned income. The Kiddie Tax applies the parents’ highest tax rate only to any unearned income of the child or teen that is greater than $2,000. Anyunearned income less than that is taxed at the child’s own rate.

Generally, the Kiddie Tax applies if:

• Your child is 18 years of age with earned income from a job that is less than or equal to half their yearly support, or
• Your child is a 19 year to 23 year old full time student with earned income from work that is less than or equal to half their yearly support (excluding scholarships). To be considered a full-time student, the child must attend school full time during at least five months of the year.

The Kiddie Tax is not just a concern of the wealthy! Any outright gifts that parents or grandparents make to a child, whether out of generosity or tax concerns, could create investment earnings subject to the Kiddie Tax if they exceed the threshold.

The Kiddie Tax does not apply to children who are 19 to 23 years of age and not full-time students or who provide more than half of their own support from earned income. It does not apply to children who are over 24 and still dependents of their parents. These are examples of children that are all taxed as adults, and at their own tax rate.

Usually, the best way to handle the Kiddie Tax is for the child to file their own tax return, including IRS Form 8615. Often when a child’s income is added to the parents’ tax return the additional income can cause unwanted tax effects. Beginning January 1, 2013, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT).

See Howard’s article on Summer Internships by clicking here.

You can reach Fiske & Co by clicking here.