“The person who gives you your first job is so important in any industry.”
~ Christopher Eccleston
Summer jobs were a staple in my childhood. It allowed me to save enough funds to support my spending for the upcoming school year. Sadly, a summer job might also include a newfound relationship with Uncle Sam. It is important to understand what opportunities a summer job will provide as well as the role taxes will play.
You may not be subject to federal income tax
As a teen, chances are your parents claim you as a dependent on their tax return. Therefore, you will not have to pay federal income taxes on earnings less than $6,300, which is the standard deduction for 2015. If you are not claimed as a dependent on someone else’s return, that number increases to $10,300 since you can also deduct your personal exemption. If you are certain that your annual earnings will be below that threshold, you can request that your employer not withhold federal income taxes. When you fill out your W4, indicate “Exempt” in line 7 to request that your employer not withhold federal income taxes. Keep in mind that even if you are not subject to federal income tax, you are likely subject to other payroll taxes such as Social Security and Medicare taxes.
In certain situations a teen employee is exempt from payroll taxes
Some summer jobs are exempt from payroll taxes like Social Security and Medicare. For example, if you babysit or mow yards and are under 18, you are exempt from payroll taxes since you are considered a household employee. If you work for the family business and are under 18, you could also be exempt from payroll taxes.
What happens if you are treated as a contractor?
Your employer may desire to compensate you as a contractor rather than an employee. That sounds great at first, since income taxes or payroll taxes won’t be withheld from your check. The downside… self-employment taxes. You will be subject to self-employment tax of 15.3% for any amounts that you earn above $400. You will be able to deduct your business expenses from your earnings, but that involves keeping good records of those expenses. Unless you are truly a contractor, be cautious about agreeing to be paid as one.
The difference between earned and unearned income
When considering how taxes affect earnings from employment, we are generally focused on Earned Income. Unearned Income (i.e. earnings from investments) is subject to different tax rules. Unearned income above certain thresholds will impact whether or not you have to file a tax return and how that income is taxed. Be sure to consult a tax advisor if you expect to have meaningful unearned income.
Taking advantage of earned income to jumpstart your retirement savings
One great advantage of a summer job is the fact that you will have earned income. Having that income makes you eligible to contribute to retirement accounts like IRAs and ROTH IRAs. You can contribute an amount equal to your earned income, subject to the 2015 max contribution of $5,500. I know, I know… you are working to buy those new jeans for next year and wouldn’t dream of using your earnings to save for retirement. Maybe you could talk a parent or grandparent into matching your earnings so you could contribute their match. It is worth a shot!