Parents of Teenagers Confused Over Taxes

The United States federal government income tax system is complex and many parents are confused as to whether their teenagers owe taxes.
Jan. 9, 2010 - PRLog -- The United States federal government income tax system is complex and many parents are confused as to whether their teenagers owe taxes. The confusion lies in the many types of income a teenager can earn and the many types of taxes levied. There are many ways that a teenager can make money today such as part-time jobs, babysitting or mowing grass, what the Internal Revenue Service calls “household employees.” Some teenage workers operate small businesses or work as independent contractors. Teenagers may also have unearned income from savings accounts or investments in their name.

Guidelines to determine if a teenager may owe taxes based on 2009 amounts.

If a teenager has earned income over $5,700 (in 2009), he or she will owe federal income tax. Earned income is from employment and the worker receives a W-2 (as an employee), a 1099MISC (as an independent contractor) or may be self-employed.

If a teenager has unearned income over $950 (in 2009), he or she will owe federal income tax on investment income. Unearned income is revenue from investments such as interest on a savings account, dividends from stock and mutual funds or capital gains distributions from mutual funds belonging to the teenager.

If a student has self-employment income over $400, he or she will owe self-employment tax. Self-employment income is the earnings from a business. Self-employment tax is the same a Social Security and Medicare taxes. The self-employment tax rate is 15.3% of net income.

If a teenager (under age 18 at anytime during the year and a student) was a household employee she does not owe self-employment tax. A household employee is a housekeeper, maid, baby-sitter, gardener, and others who work in or around a private residence as employees.

The tax return for a teenager may be confusing because there is more than one type of tax levied on the Form 1040. Both federal income tax and self-employment tax are calculated on the form. There is also more than one type of income that is taxed. The IRS has created separate forms and schedules for unearned income, self-employment income and investment income. The thresholds vary depending on the type of income and type of tax. Some of the thresholds are adjusted every year, but some have not been adjusted in decades, such as the $400 threshold on self-employment tax.

“The whole issue of teenagers and taxes gets complicated”, explains Carol Topp, a Certified Public Accountant in Cincinnati, Ohio. “People frequently ask if their teenager’s babysitting income needs to be reported to the IRS. I explain that a teenager providing a service at a home, like lawn care or babysitting, is classified as a ‘household employee.’ As long as the teenager is under age 18 at anytime during the year and a student, the employer does not have to pay social security taxes, nor does the teenager pay self employment tax. The student worker may pay income tax if they earned over $5,700, the threshold for paying federal income tax in 2009.”

Teenagers wanting to start their own business need to be aware of the tax implications says Topp, who runs a website, “Even a small business selling crafts may pay three types of taxes: income tax, self-employment tax, and sales tax. I’ve met several teenagers that have small businesses and find that they may not owe federal income tax, but they do owe self-employment tax at 15.3% of their profits. This is a shocking wake-up call to a teenage entrepreneur.” Topp recommends that teenagers keep good records of every sale and every expense. She also recommends meeting with an accountant when first starting a business to help a teenager understand taxes, deductions, making payments to the IRS, tracking inventory, recording sales and paying sales tax.

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Certified Public Account, Carol Topp, CPA operates an accounting practice specializing in tax preparation, micro business start ups, and non-profit accounting.
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