While the summer is a time for vacations and outdoor activities for adults, it’s also usually the time your teen will land their first job.
Initially greeted with excitement at the thought of the extra cash they will earn – maybe saving for a car, college, or just to spend on themselves.Â Â With their first job comes real responsibility, including taxes, which may also affect the parents. So does your teen need to file an income tax return?Â Â Well, it depends on their age, income level and source(s) of income.
In the 1980’s, Congress passed the Kiddie Tax law to make sure that parents are not using their children as a tax shelter for unearned income.Â Â This law applies to dependent children under the age of 19, or 23 if they are still dependent, full-time students and unmarried. This law affects both earned income
(wages, salary, and tips) and unearned income
(income from investments, interest, dividends, etc.).
For 2013, as long as your child receives earned income of less than $6,100, there is generally no need to file a federal tax return. If they do not expect to earn more than $6,100 for the year, then they should make sure to claim an exemption from federal withholding when filling out their W-4. If they do earn over $6,100 in earned income, then they will subject to the taxes at the rate of their income level, just like their parents.
Unearned income is taxed separately.Â Â The first $1,000 is considered tax free; Â $1,001-$2,000 will be taxed at the child’s rate of their income level; and all of your child’s unearned income above $2,000 (note this is combined unearned income) will be taxed at their parents’ tax rate. If your child earns less than $9,500 of unearned income, they can file a tax return separately.Â Â If over, $9,500, then they will need to file on their parents’ return.
If your child possesses the entrepreneurial spirit, launches their own business and has net earnings of just over $400, he/she might be subject to self-employment tax.
As you can see, taxes for children can be as easy or as complex as for their parents.Â Â Depending on the amount, source of income, and your child’s age, filing can be as easy as completing a W-2, or as hard finding out how to report self-employment taxes, and gets more difficult if there is a mix of earned and unearned income.
Be sure to contact us if you are unsure how your child should report their income.
Becky Brown | North Georgia Accounting Consultants, Inc.
770-888-7700 | www.NGACinc.com