It’s summertime. Many school-aged kids will be working this summer. Depending on their earnings, the money they make may be subject to income taxes. These tax tips will help you understand some of the basics relating to how your kid’s earnings will be taxed.
As kids start to work, there are more options for taxes for both the kids and the parents. The tax professionals at Bryant & Associates, P.C. can assist you. They want to be sure you are saving on income taxes and building as much wealth as possible.
Tax Returns
Supposing you do not have any other means of income, your child can earn as much as $6,300 during 2016 before a federal income tax return is required to be filed. Many times, kids will complete Form W-4 is such a way that income tax is withheld from their paychecks. If that is the case, your child will need to file a return to receive a refund of any taxes withheld.
Federal Income Tax Withholding
Once employed, your child will need to complete Form W-4, (Employee’s Withholding Allowance Certificate). This form informs the business owner the amount of federal income tax to withholding from the earnings. In the event that the job entails tips, keep in mind that tips are taxable earnings. Have your child keep records of the tips received each day they work.
Financial Aid
There may be a potential downside to that summer job. Summer income can have an effect on your child’s qualification for college financial aid. If you’re hoping on financial support, find out more about the earnings threshold in advance. It’s important to know if the summer earnings will decrease the financial aid.
Retirement Savings
Think about persuading your child to start a Roth IRA. A Roth IRA can be a powerful savings tool. Money invested in a Roth could increase significantly because of tax-free compounding over several years. To encourage your kids to save, you could match up whatever amount your child agrees to save. Additionally, savings in a Roth IRA can be used for college or for a first home.
State Laws
It is also important to understand the rules in your state regarding young workers. There are many times the federal and state laws are different. The rules with the better protection will apply. Therefore, be sure to check out the rules in your state.
Taxes can be very stressful…especially if you have something different this year. The tax professionals at Bryant & Associates, PC are here to help take that stress away. Being proactive and doing some tax planning before the end of the year can help eliminate surprises when you file your tax return. If you have any questions or would like to hear more about our tax preparation services, please contact us today!
