Summer jobs: tax considerations for parents and their children

July 13, 2022 | by Atherton & Associates, LLP

For many teenagers, summer often means a time for family barbecues, 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 their 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, they 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 your child 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, they can claim an exemption and shouldn’t have to file a tax return. If your child does not claim an exemption and their 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 they aren’t subject to FICA taxes. Expect the employer to withhold Social Security and Medicare taxes, also known as FICA, from their paycheck.

Family business taxes

Hiring your child to work in the family business can provide payroll tax benefits. If your business is a sole proprietorship or an LLC and you employ your child (under age 18), the child’s wages may be exempt from FICA withholding. If your business is 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 their 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. Their compensation reduces your taxable income by $5,000, and because their 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, their 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, they will need to pay self-employment tax which includes the 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 their income and pay the 15.3% self-employment tax on all their 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, they may need to pay quarterly estimated taxes. However, they will not need to make estimated tax payments for the current year if:

1. They had no tax liability for the prior year.
2. Their prior tax year covered a 12-month period.
3. They were 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 they will have to pay. 

Household employees

If your child is employed in a private residence performing domestic chores such as babysitting, cleaning or gardening, their 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. 

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. Their employer is also not required to withhold federal income tax paid to a household employee. 

Our office can assist

While paying taxes can be daunting, it’s a great learning opportunity for your child. This article provides just an overview of tax considerations for a child’s earnings and is not a substitute for speaking with one of our expert advisors. Please contact our office if you have questions or need assistance with your child’s taxes. We’d be happy to discuss your unique situation and how we may be of service.