ARTICLE | July 12, 2022
For many teenagers, summer often means a time for sports camps, swimming in the pool, and working a summer job. For many parents, this means dealing with the tax implications of their child’s income. In this article, we’ll provide an overview of what tax filings may be required for your working teenager.
Do children need to file a tax return?
Children who are dependents generally do not need to file a tax return unless they have earned income greater than the standard deduction, which is $12,950 for 2022. However, tax rules differ depending on the type of employment. Below we cover the tax considerations if your child is:
- Employed by a third party,
- Employed by your family business,
- Self-employed, or
- A household employee.
Employee taxes
If your child works for someone else’s business, such as a restaurant or a local store, she should fill out a W-4. If they did not have a federal income tax liability in the previous year and expect to have no federal income tax liability in the current year, then children may claim an exemption from federal income tax withholdings on the W-4. The standard deduction for 2022 is $12,950, so unless your child expects to earn more than the standard deduction, he can claim an exemption and shouldn’t have to file a tax return. If your child does not claim an exemption and his employer withholds federal income taxes, you will want to file a tax return and potentially receive a refund of the withholdings.
It’s important to note that just because a child may be exempt from federal income tax withholding doesn’t mean she isn’t subject to FICA taxes. Expect the employer to withhold Social Security and Medicare taxes, also known as FICA, from paychecks.
Family business taxes
Hiring your child to work in the family business can provide payroll tax benefits. If your business is taxed as a sole proprietorship and you employ your child (under age 18), the child’s wages may be exempt from FICA withholding. If your business is taxed as a partnership, you may be able to take advantage of the FICA exemption as long as the partners are the child’s parents (if you have a non-parent business partner, you will not qualify for this exemption). Additionally, payments to your child under 21 are not subject to federal unemployment (FUTA) taxes.
Hiring your child will also help your family save on income taxes. Compensation paid to your child is tax-deductible, which reduces your taxable income and may reduce your self-employment taxes. Because of the standard deduction, your child will not have to pay federal income tax on some, if not all, of her earnings from your company. In this situation, your child must work for your business and be paid reasonable compensation for a legitimate job.
For example, you own a sole proprietorship, hire your child to work for the summer, and pay them $5,000. The child’s compensation reduces your taxable income by $5,000, and because his income is less than the standard deduction of $12,950 it is not subject to federal income taxes. You also do not have to contribute to FICA or FUTA as long as your child meets the age requirements.
Self-employment taxes
Taxation can get slightly more complicated if your child performs independent work, like mowing lawns or tutoring. While the standard deduction still applies for federal income tax purposes, her income will be subject to self-employment tax.
When employed by a typical company, the employer and employee each pay social security and Medicare taxes (FICA) of 7.65%. However, if your child is self-employed, he will need to pay self-employment tax which includes a combination of the employer and employee portion of social security and Medicare taxes totaling 15.3%.
Your child will need to keep accurate records of income and pay the 15.3% self-employment tax on all profits over $400. The good news is that these taxes will go toward your child’s eventual social security and Medicare benefits.
Many self-employed individuals, including children, must also file and pay quarterly estimated taxes. In general, if your child expects to owe at least $1,000 in taxes for 2022, she may need to pay quarterly estimated taxes. However, she will not need to make estimated tax payments for the current year if:
- She had no tax liability for the prior year.
- Her prior tax year covered a 12-month period.
- She was a U.S. citizen or resident for the whole year.
Form 1040-ES, Estimated Tax for Individuals, can help determine whether your child will need to pay quarterly estimated taxes and how much he will have to pay.
Household employees
If your child is employed in a private residence performing domestic chores such as babysitting, cleaning or gardening, his work may trigger the IRS’s household employee rules (also called the “nanny tax”). A worker is deemed a household employee if the employer “controls not only the work they do but also how they do it.” However, individuals who provide services as independent contractors are not considered household employees but are considered self-employed (see previous section).
Household employees are exempt from FICA withholding if they are (a) the employer’s child under age 21 or (b) a child under age 18 at any time during the year. A household employer is also not required to withhold federal income taxes on wages paid to household employees.
This article is provided solely for informational and educational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of this information or its fitfulness for any purpose. As such, KHA Accountants, PLLC cannot be held liable for any information derived from the article or from referenced sources. Consult your legal and business advisors prior to making financial decisions.
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