In this episode of the Dollars and Sense Show host Carol Topp discusses taxes and teenagers.
A teenager files their own tax return! Do NOT add your child’s income to your tax return.
You can still claim your teenager as your dependent. They check a box stating they are claimed as a dependent on your tax return.
Major taxes affecting teenagers: earned income, unearned income, and self-employment tax.
Earned Income from a job or micro business (including babysitting). Federal income tax is owed if earned income is more than $6,100 (in 2013)
Unearned Income: interest, dividends, capital gains on taxable accounts in the student’s name. Federal income tax is owed if unearned income is more than $1,000. Between $1,00 and $2,00 unearned income is taxed at child’s tax rate. More than $2,000 unearned income is taxed at parent’s rate on Form 8615 (“Kiddie tax”)
Same as Social Security and Medicare for self-employed people. 15.3% of profit over $400. Unadjusted since 1954 (adjusted would be $6,250). Schedule SE attached to Form 1040. Reported on Line 56 under Other Taxes on back of Form 1040. (the “hidden” tax)
Example: $5,000 profit earned by single teenager. Income tax $0. SE tax $706!
If you’d like to see this changed, visit MicroBusinessForTeens.com/eliminate-tax-on-teen-entrepreneurs for a position paper you can share with your congressman.
Exception to SE tax for teenage Household Employee: Students under age 18 working in or around an individual’s home is a household employee are not subject to SE tax. Report wages on Form 1040 Line 7 with “HSH” as note. Examples: babysitting, lawn care, house cleaner
Teenagers scammed: Treated as independent contractor instead of employee.
Signs: Paycheck with no SS/Medicare withheld. Paid in cash. 1099MISC not W-2.
Action: Complain to employer. File complaint with IRS (Form SS-8) and Form 8919 to pay half SS/Medicare.
Teens and Taxes ebook by Carol Topp, CPA available at TeensandTaxes.com
Money and Taxes in a Micro Business by Carol Topp, CPA available at MicroBusinessForTeens.com
IRS Understanding Taxes website http://apps.irs.gov/app/UnderstandingTaxes
Tune in for the next Dollars and Sense show on March 27, 2014 when Carol will discuss 5 Money Myths that homeschool moms believe.