Mothers love discussing their children’s milestones. “How old was he when he walked?” “What were her first words?” To be honest, if you ask most fathers these questions you probably won’t get such an accurate answer. “I don’t know; he was probably about 1 or 2 when he walked. Definitely less than 3. I remember him being pretty short, so less than 3 sounds right. Final answer.” “I believe her first words were gaga followed by a googoo.”
But if you ask that same man how old his child was when she got her fi rst summer job, then he’ll know exactly. “She was 15 years, three months and four days old.” This is the ultimate milestone for a parent. It’s not just the achievement of getting a job; it’s a complete reversal of fortunes— literally.
Think of your child as a vacuum cleaner. They are always sucking everything in—tuition expense, camp expense, spending money etc. Then imagine someone flipped that switch that makes the vacuum blow air out. Instead of sucking in all your cash, they’re actually spitting out dollar bills. So it’s not just that your child stops spending all of your money for this moment in time, but they’re actually contributing in a positive sense to your economic situation.
Before you get too excited, realize that this is short-lived. The summer is coming to an end before you know it and the vacuum will be turned back on. But in the meantime, it’s best to consider the tax implications of your child working.
Tip 1. Know Your Tax-Filing Requirements: There’s a good chance your child won’t be required to fi le a tax return for his or her summer earnings. If your child is an employee, then they must earn more than $6,300 in 2016 to meet the filing requirements. If your child is considered self-employed then the threshold is only $400.
But that doesn’t mean your child shouldn’t fi le a tax return. If the employer has been withholding income taxes, and the wages are below $6,300, then your child can file a tax return and get back all that money. However, the Social Security and Medicare tax is not available for refund.
Tip 2. Claiming the Working Child as a Dependent: Just because your child isn’t a deadbeat 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.
Tip 3. 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 fi le a tax return, then consider not withholding income taxes. But if you’re not sure, you may want to err on the safe side.
Tip 4. 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 your child is under age 18 then there’s no need to pay Social Security, Medicare and unemployment taxes.
Tip 5. Contribute to a Roth IRA: Now that your child is employed, they can contribute to a Roth IRA. Chances are, your teenager won’t be retiring anytime soon. But with a Roth IRA, all that money that’s socked away in the fund will grow completely tax-free. So that’s decades of growth at no cost. Additionally, they can even withdraw the contributed amounts tax-free and penalty-free at any time.
Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions off ers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at dmagence@pristinecpa. com 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.
