It’s been said that children are the most expensive free things you’ll ever have. Truer words have never been spoken.
In fact, the US Department of Agriculture came out with a study concluding that each child adds on average $14,970 in annual expenses to their parents, and costs over $245,000 to raise to age 18. The funny thing is, as outrageous as that number sounds, it clearly doesn’t include private school tuition, so you may want to triple those figures in your calculations.
Oh, and here’s something they don’t teach you in parenting school—camp is super expensive also! Everyone loves to warn people about day-school tuition, but somehow they forget to mention the cost of some of these camps. You know what? Let’s quadruple those figures above just to be safe.
But it’s every parent’s dream that one day when those beautiful little financial parasites are old enough, they will get a summer job and contribute to the family’s greater good. Or at the very least, pay for some of their own stuff. For those who have children in this stage of life, God bless you. For those that aren’t there yet, just keep the faith and know that someday it will be your time. But either way, you need to know the tax implications when your children have summer jobs.
Here are six tax tips that you should know:
1. The child may or may not need to file a tax return. There’s a good chance your child won’t be required to file a tax return for his or her summer earnings, but it may depend on their unearned income. “Earned income” is income a child earns from working. “Unearned income” is income earned from investments, such as dividends and interest.
Earned income only: If your child only earns income from working, then if your child is an employee, they must earn more than $12,000 in 2018 to meet the filing requirements. If your child is considered self-employed then the threshold is only $400.
Unearned income only: If you child only has income from investments, then they are required to file a return if they make more than $1,050.
Earned and unearned income: If the child has both earned and unearned income in 2018, then they must file a return if: (1) earned income was over $12,000, or (2) unearned income was over $1,050, or (3) earned and unearned income together total more than the larger of (a) $1,050 or (b) total earned income plus $350.
Example: Your 17-year-old son earns $3,000 from a summer job and received $300 in dividends from his investments. He is not required to file a tax return in 2018. Both his unearned and unearned income are below the thresholds, and his total income of $3,300 is less than his total earned income plus $350 ($3,350).
2. Filing even if not required. Just because your child isn’t required to file a tax return, doesn’t necessarily mean your child shouldn’t file a tax return. If the employer has been withholding income taxes, and the wages are below $12,000, then your child can file a tax return and get back all that money. However, the Social Security and Medicare taxes are not available for refund.
3. Contribute to a Roth IRA. Because your child earned wages, they are eligible to contribute to a Roth IRA. This is a very effective way to start their retirement fund at an early age. A Roth IRA allows all of the money in the fund to grow completely tax-free. So that’s decades of growth at no cost. And it’s not only useful for retirement. They can even withdraw the contributed amounts tax-free and penalty-free at any time. So they can use some of that money for college, camp or even some squishies if they want.
4. Claiming the Working Child as a Dependent. Just because your child made money this summer doesn’t mean you can’t claim them as a dependent. Any child under 19 years old (or under 24 years old if a full-time student) can be claimed as a dependent as long as you provide more than half of their support. Support includes food, shelter, clothing, entertainment, schooling expenses etc.
5. Filling out Form W-4: Form W-4 instructs the employer how much tax to withhold from the paychecks. If your child will not be required to file a tax return, then consider not withholding any income taxes. But if you’re not sure, you may want to err on the safe side.
6. Consider hiring your child. Hiring your child not only provides them with some extra spending cash, but can also lower your tax bill. It’s a legal way of shifting taxable income away from your high tax bracket to your child’s low, or even zero, tax rate. Plus, if you are a sole proprietor (or 100 percent owned LLC) and your child is under age 18 then there’s no need to pay Social Security, Medicare and unemployment taxes.
By Daniel Magence
Daniel Magence, CPA, Esq., is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.