How Summer Jobs For Teens Can Affect Your Client’s Tax Returns
A Comprehensive Guide
As the warm weather rolls in and schools close for summer break, many teenagers are excitedly preparing for summer jobs. Whether lifeguarding at the local pool, working as a camp counselor or serving up ice cream at the neighborhood scoop shop, summer jobs provide valuable opportunities for teens to gain work experience and earn some extra income. However, it's important to understand that these jobs can also impact your client's tax returns. This comprehensive guide will explore how summer jobs for teens can affect tax returns and offer practical advice to navigate this aspect of your client's financial planning.
Understanding Tax Filing Requirements:
As you more than likely already know, when teens enter the workforce, they become subject to the same taxation rules as adults.
It's crucial to explain to your clients that their teen's earnings may be subject to federal income tax, state income tax (if applicable), and FICA taxes (Social Security and Medicare).
It is important to let your clients know that depending on how much income their teen makes, that teen may need to file a tax return, and there is a potential they could owe taxes. For the 2023 tax year, this threshold is $13,850 for single individuals.
Identifying Taxable Income:
Educating your client about what constitutes taxable income for their teen is crucial. Taxable income includes wages, salaries, tips, and any other compensation received from their employment. Emphasize the importance of keeping accurate records of their earnings throughout the summer job, as this information will be needed when the teen is filing their tax return.
Dependents and Exemptions:
Lots of teenagers are still claimed as dependents on their parent's tax returns. Understanding the rules regarding dependents and exemptions is vital when preparing your client's tax returns.
Standard Deduction vs. Itemized Deductions:
When guiding your clients through their tax returns, discussing whether their teen should take the standard deduction or consider itemizing deductions is important.
Taking the standard deduction is often more straightforward and beneficial for most teenagers with limited expenses.
However, if your client's teen has significant deductible expenses, like education-related costs, it may be worthwhile to explore itemizing deductions.
Tax Credits:
Exploring tax benefits related to education expenses is important for teens planning to continue their education after high school. The American Opportunity Credit and the Lifetime Learning Credit are two examples of tax credits that may be available to eligible students. Inform your clients about these opportunities, as they can help offset the cost of college or vocational school.
Self-Employment Taxes:
If your client's teen starts a small business or is a self-employed contractor, they may be subject to self-employment taxes.
It's important for you to explain the concept of self-employment taxes, including the calculation method and the need to file Schedule C along with their tax return.
Be sure to provide guidance on record-keeping and deductible expenses for self-employed teenage workers.
Education Savings and Tax-Advantaged Accounts:
Many parents use summer jobs to educate their teens about financial responsibility, such as saving for college.
Advise your clients on the benefits of opening tax-advantaged accounts, such as a Coverdell Education Savings Account (ESA) or a 529 plan, to help save for future education expenses. Remember to explain the tax advantages and contribution limits associated with these accounts.
It Can Easily Be Overlooked, But Don’t Make That Mistake!
It can be easy to overlook the summer jobs of your clients' kids! But as a tax professional, understanding the impact of summer jobs for teens on your client's tax returns is essential.
It will make your clients trust you more as you give them the best possible advice you can!
By providing comprehensive guidance on taxation rules, dependents and exemptions, deductions, tax credits, self-employment taxes, education savings, and household employment considerations, you can ensure your clients are well-informed and make the most of their tax benefits.
