Summer has arrived! Whether you’re parked at the pool, planning a fabulous vacation, or just staying cool in the AC, it’s a time when life slows down a bit for many of us. If you have children or grandchildren who are getting ready to begin a summer job—or a recent graduate launching his or her career—we have some tax tips to help that newly minted taxpayer get the most out of his or her summer employment.
1. Dependents may be exempt from withholding for summer jobs.
Before your dependent fills out a W-4 form for a summer employer, do some math. He or she may not be required to file a tax return for 2019 if the following are true:
- You claim your child as a dependent on your tax return
- The dependent didn’t owe any income tax in 2018
- The dependent is unmarried
- The dependent will earn less than $12,000 for the year
Refer your child to the IRS’ filing requirements for dependents to check the details. He or she will need to forecast his or her earning potential at the summer job. If it looks like the total earnings will safely fall under the amount that exempts a dependent from withholding, the dependent can write EXEMPT on line 7 of the W-4. Don’t forget to factor in any income that may come later in the year (for example, if your child plans to work after school in the fall or during winter break, he or she would need to include that income in the forecast as well).
Claiming an exemption from filing means the employer won’t withhold income tax. It’s a great way for your dependent to get a larger paycheck, but be cautious. If it turns out that he or she does need to file a return, the IRS can levy penalties for improperly claiming the exemption.
2. New grads can use part-year withholding.
Income tax withholding tables assume the taxpayer earns a full year’s income when dictating how much to withhold. When a taxpayer is starting a full-time job, he or she can request part-year withholding to avoid having too much tax withheld. As long as the taxpayer expects to work fewer than 245 days in the year, he or she can submit a written request to the employer to have tax withheld at the part-year rate. If a newly employed taxpayer doesn’t request part-year withholding, he or she may have a larger-than-expected refund at tax time. The downside to having more tax withheld than you owe is that you’re giving the government an interest-free loan.
3. Business owners can hire their own children.
If you’re a sole proprietor, a husband-wife partnership, or a one-person LLC, you can hire your children without paying FICA tax. You also don’t owe unemployment tax on their earnings as long as they’re under the age of 21. Depending on the nature of your business, it may make sense to put your kids to work for you this summer.
4. Consider opening a Roth IRA.
While there may not be many teenagers thinking about retirement savings, you as a parent or grandparent are probably aware of the incredible benefits of starting that fund early. You can contribute to your family member’s Roth IRA on his or her behalf, up to $6,000 for the year, and the contribution can count toward your annual gift tax exclusion. Not only that, but you’re helping your teen learn about the importance of saving money and the very real benefits that can come from an investment with lots of time to grow.
One catch: your contribution can’t exceed the teen’s own earnings for the year.