Summer is a great time to relax and recharge, but it is also an excellent chance for students to get work experience, do an activity they enjoy, and boost their chances of getting into a top college.
Now that Memorial Day weekend is over and summer is officially in full swing, many high school and college students are thinking about getting a seasonal job. From retail to babysitting, manning the lifeguard chair or working a seasonal boardwalk gig, there are plenty of opportunities while on summer break. But if it’s your child’s first job, this first paycheck can be a learning experience.
A summer job may be the first time that kids will need to fill out an IRS Form W-4 to specify how much money will be withheld from paycheck for income taxes. Figuring out what to claim as an adult can be tricky, but it is typically a little easier for kids and young adults just getting started in the workforce.
With the increased standard deduction (a child can earn up to $12,200 in 2019 without paying income tax), it is less likely that a teen filing on his or her own will owe taxes. If you are sure that you would not owe taxes, you should consider claiming an exemption from withholding. If you do not know, claim 0 or 1, since any over withholding should be refunded to you upon filing your tax return. However, a child who is claimed as a dependent by someone else cannot claim an exemption from withholding if he has more than $350 of unearned income (from interest and dividends, for example) and his total income is more than $1,100 in 2019.
The more allowances you claim, the less federal income tax your employer will withhold from your paycheck, meaning a bigger your take-home pay. The fewer allowances you claim, the more federal income tax your employer will withhold from your paycheck and the smaller your take-home pay. If you do not have enough withholding, you will owe taxes at the end of the year. If you have too much withholding, you will be due a refund.
No matter how your child fills out the W-4, he will still have Social Security and Medicare taxes withheld from his paycheck, and that money won’t be refunded even if he files a return. However, it counts towards his Social Security earnings record, which is used to determine his benefits in the future.
Kids with summer jobs should also consider contributing to a Roth IRA. You just need earned income from a job to be eligible to contribute to a Roth, regardless of your age. Rather than stashing your cash in a typical savings account, you can consider Roth IRA. With a Roth IRA, you pay taxes on your contribution but the income grows tax-free for federal income tax purposes. A child can contribute up to the statutory limit ($6,000 in 2019), or his or her earned income, whichever is less. A Roth IRA for your child does not have to be funded using only your kid’s income. As a parent, if you want to give him a few dollars to maximize the contribution, that is ok too.
Starting a Roth when he is young can give your child a huge start for the future. He can withdraw the contributions tax-free and penalty-free at any age, and he can withdraw the earnings tax-free after age 59 ½. A Roth IRA lets your investments grow longer, tends to offer more investment options, and allows for easier early withdrawals. Roth does not require you to take RMDs ever. That flexibility gives you the option to keep contributing to your account and letting those funds grow indefinitely, which is beneficial if you do not need them at age 70 ½.
For more information, you can hire a professional to help you handle complicated tax situations and even represent you before the IRS in the event of an audit. Contact us today for guidance with your individual situation.
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Author: Valentina Efremova
Empowering business owners and individuals in South Jersey and Philadelphia to feel confident through proactive accounting and advisory solutions.
