‘Tis the season for teenagers to find that memorable and rewarding job to fill those lazy summer days. Most of us remember the thrill of that first paycheck and the feel of earning those first independent dollars. There is, however, a more serious side to joining the work force and that’s learning positive financial habits and the responsibility of taxes. Parents and their teens should be aware of a few tax-related issues when it comes to earnings from those summer jobs, so our tax attorneys in San Jose have put together this handy guide to help your teen avoid any tax trouble.
Filling Out Tax Forms
Teens working their first summer jobs may be encountering the issue of filing taxes and the W-4 form for the first time. What many teens, and their parents, don’t realize is that even without owing taxes, it can still be important to fill out those tax forms, and this responsibility and accountability can teach valuable life lessons down the road. Mark Luscombe, of Wolters Kluwer Tax and Accounting, suggests two options for teens filing taxes: the first is if they are sure they won’t owe any taxes, to claim an exemption from withholding. The second option is for those who are unsure to claim ‘0’ or ‘1’ as any over-withholding will be returned in the form of a tax refund.
The key is to find the right balance of allowances claimed. The more allowances an individual claims, the less federal tax will be deducted from the paycheck, making the take-home pay larger; on the flip side, the less allowances an individual claims, the smaller the take-home pay will be. You won’t want to have inadequate withholding and end up owing taxes, but if you are withholding too much, you can end up with a refund.
Getting Paid in Cash
Many people, adults and teens alike, think that getting paid in cash ‘under the table’, is a great deal as it is non-taxable income. Uncle Sam, however, can see it differently, and even if an employer pays in cash to avoid reporting paid wages, that mistake should remain with the employer and not be extended by the employee. Even if those summer jobs don’t come with tax forms, it’s likely a good idea to report the income to ensure you are doing the right thing, and this is a another good financial lesson to learn for those experiencing their first foray into the world of earnings and taxes.
When it comes to tax time, most people focus on federal taxes and sometimes forget that local tax laws can vary from state to state. While on the federal level, many returns are exempt to certain low-income earners, there are states whose tax laws apply to every dollar of earned income, including the first. Some states also offer tax credits for low-income earners, but in order to qualify, they have to file their taxes. So when tax time roles around, make sure you and your teens are aware of state and local taxes, as well as federal.
For teens entering into the workforce this summer for the first time, this is an excellent opportunity for them to learn some financial responsibility and accountability. While many think that filling out tax forms is limited to paying taxes, there are circumstances where filling out those forms should still be done, even if your teen won’t actually owe any taxes. Being mindful of what exactly it means to be paid in cash is also a valuable lesson in accountability as in the eyes of the federal government, income earned should be income reported. Teaching your teen to inform themselves of all the tax laws they are beholden to at the federal and state levels can also be a valuable lesson to avoid costly tax mistakes being made down the road.
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