Tax laws for teens (yes, they exist)
When you’re young and starting a business, paying taxes is probably the last thing on your mind, if it’s in your radar at all. Most will be more concerned about capital, marketing, and day-to-day operations, which are enough of a headache as it is. However, as your earnings increase to nontrivial levels, taxes do inevitably come in. CPA Carol Topp has assisted many teenagers in filing their tax returns, and she has listed the following facts about tax laws for those 18 and under:
* A teen under the age of 18 who is also a student during some part of each of any five calendar months in the tax year, is considered a child (or minor) for tax purposes, and therefore subject to tax rules regarding children (often called “kiddie tax”).
* Threshold amounts are the amounts at which income becomes taxable. 2006 teen employment thresholds are: earned income, $5,150; unearned income, $850; self-employment (SE), $400. (Most amounts are adjusted annually.)
* Earned income is ANY income or wage earned from a job. It includes cash as well as any income for which the worker receives a Form W-2 or Form 1099-MISC.
* Unearned income comes from investments such as savings accounts, dividends from stock and mutual funds owned in custodial accounts, and capital gains for the sale of stock or mutual funds. Students with more than $850 of unearned income owe federal income tax.
* Self-employment (SE), social security (FICA), and Medicare are all considered SE taxes. Self-employed teens must pay SE tax on any net income over $400 and report their income and SE taxes on Form 1040. Frequently additional forms and schedules are required as well. “However,” notes NATP member, Dawn J. Renner, CPA, from Minnetonka, MN, “Teens under age 18 who work for their parents’ business are not subject to FICA or Medicare tax unless the business is incorporated, a partnership (unless each partner is a parent of the child), or an estate.”
* Teens who are household employees do not owe SE tax; however, income is reported on Form 1040, Line 7, broken out from any W-2 wages. The household (also called domestic services) income amount should be indicated with a code of “HSH”. Household employees are housekeepers, maids, babysitters, gardeners, and others who work in or around private residences as employees.
For more of these and a study of certain scenarios for clarity, head on over to her article at TaxProfessionals.com.
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