Summer, Kids and Federal Taxes: Factors to Consider
Your kids whereabouts during the summer break can impact what tax credits or deductions you may be able to claim, and dictate whether they’re required to file a Federal tax return next Spring. Here’s a look at how your kids summer activities can impact your (and potentially, their) taxes.
Help your teen complete tax forms associated with a summer job. Got a teen who scored a legitimate summer job? Help him navigate tax paperwork an employer may require him or her to complete before he learns about taxes the hard way.
If your teen is classified on an employer’s payroll as an employee, he’ll be asked to complete a W-4 for tax withholding. Talk to your teen about the amount of work hours the employer has said he will work each pay period, the hourly rate he’ll be paid, and whether the job could extend beyond the summer. Based on your conversation, run the numbers on how much you expect your teen to make at a summer job. If he’ll earn less than $6,300 in 2016, he may not be legally required to file a tax return—but may want to come April in order to claim any tax refund that is owed as a result of tax withholding.
If your teen will make well under $6,300 in 2016, filing a tax return isn’t necessary—but he may want to claim an exemption from Federal tax withholding (line 7 on a W-4) for a bigger summer paycheck.
Confirm how the employer classified your teen. Do not assume that your child is considered an employee, or a contractor based on the hours the job entails, or where and when work is performed. Employers commonly misunderstand the nuances between the IRS’ definition of an employee versus an independent contractor. While there is a fine line between the two, particularly in an era where remote work arrangements are increasingly common, how your teen’s employer classifies their role has significant tax implications.
If your teen is considered a contractor, for example, he could be required to pay self employed taxes for earnings that exceed $400 for the year. Though the IRS does offer some self employment exemptions for workers who are under 18, and perform “household jobs: like babysitting at someone’s home, or mowing lawns, confirm how the employer classifies your child’s work so you’re not surprised at tax time.
Explain taxes to your entrepreneurial teen. Teens who own a for-profit business—whether it’s baking cookies, selling crafts, designing websites or teaching piano lessons –are considered self-employed; they’re subject to the same tax regulations as adult entrepreneurs. Explain to your teen how taxes work when you own and operate your own small business. When she understands the responsibility that comes with being the boss, she can set rates and prices that take tax liability into account, and develop an organized system to track expenses, income, and the supporting information she’ll need when it comes to prepare a Schedule C, and file 2016 self employment taxes.
As far as your own taxes, your teen’s summer job shouldn’t impact whether you can claim him or her as a dependent, assuming you fund at least half of your child’s living expenses during the course of the year and no one else claims him.
The tax benefits of summer child care
Have kids who are under the age of 13? You can still benefit from the potential tax advantages of where and how they spend summer break. You may be eligible to claim up to 35 percent of $3,000 you spend on each child for summer day care, or tattendance at a variety of summer camps (provided the camps do not involve overnight stays), under the Child and Dependent Care Credit. As long both parents send the child to camp or day care in order to work, the credit could reduce your tax liability, dollar for dollar.
Like any other expense you claim on taxes, make sure you have documentation supporting how much you paid, when and to whom, along with the care provider’s (or organization) name, address and EIN. You can also reduce the overall cost of summer camp or day care by paying the fees directly from a dependent care spending account your workplace may offer.