As the summer break from school approaches, many students are looking for part-time summer employment. Both parents and students should be aware of the tax issues that need to be considered when working a summer job. Here is a rundown of some of the more common issues:
Completing Form W-4
The W-4 form is used by employers to determine the amount of tax that will be withheld from an employee’s paycheck. Students with multiple summer jobs will want to ensure that all of their employers are withholding adequate taxes to cover their total income tax liability. Generally, a student with income only from summer and part-time employment and who is claimed as a dependent of someone else can earn as much as $12,950 (the standard deduction amount for 2022) without being liable for income tax. However, if the student has investment income, the tax determination becomes more complicated because special rules apply as he or she is dependent on another.
Watch Out for Payroll Surprises
Some employers may attempt to avoid their payroll tax liabilities by paying the student in cash and incorrectly treating them as an independent contractor, thus leaving the student responsible for paying both the employee’s and employer’s payroll tax liability (see self-employment tax below). If a potential employer intends to do that, they will ask the student to complete a Form W-9 rather than a W-4 or simply ask for their Social Security Number (SSN) without requesting a W-4.
A student who works as a waiter or a camp counselor may receive tips as part of their summer income. All tip income received is taxable and subject to federal income tax. Employees must report tips of $20 or more received while working with any employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2.
Many students do odd jobs over the summer and are paid in cash. Just because the payment is in cash does not mean it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing.
When a student works as an employee, the employer withholds Social Security tax and Medicare tax from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. On the other hand, a self-employed student must pay the combined employee and employer amounts on their own (self-employment tax) if the net earnings are $400 or more. This tax pays for future benefits under the Social Security system and Medicare Part A. Even if the student is not liable for income tax, this 15.3% tax may apply to a student’s odd jobs.
Working for Parents
A child under 18 working in a business solely owned by his or her parents is not subject to payroll taxes. This saves the child from paying the 7.65% payroll taxes and also provides the parent with relief from payroll taxes. The payroll tax exception won’t apply if the parent’s business is set up as a corporation.
Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
Newspaper Carrier or Distributor
Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:
They are in the business of delivering newspapers;
All of their pay for these services directly relates to sales rather than to the number of hours worked; and
They perform the delivery services under a written contract that states that they will not be treated as an employee for federal tax purposes.
Newspaper Carriers or Distributors Under Age 18
Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.
Retirement Plan Contributions
Putting away money for retirement is probably the last thing a student will want to spend their summer earnings on. However, earning income opens up the opportunity to make traditional and Roth IRA contributions.
If you are a student or the parent of a student with questions about these or other issues associated with student employment, please call this office for assistance.