Kids and summer jobs: IRS lessons for a lifetime

By Dian Vujovich

It’s summer  and what better time to send your kid to work. Yes, work. Really.

Whether kids come from Palm Beach affluent households or a home where food stamps provide the meals, the sooner a young person learns about the reality of work, the better. And, summer is a great time to get acquainted with that concept. Provided, of course, little Annie can find a job. But that’s a blog for another day. Today, this one is all about work.

I frequently get emails from the California Society of Certified Public Accountants (CPA) (www.CalCPA.org). The most recent one included steps to help students understand Uncle Sam and his taxing policies. In other words, in  it were answers relating to this question that no doubt crosses every first time employees mind: “How come I worked 40 hours at 10 bucks an hour and my check wasn’t for the full $400 I earned?”

Here, gleaned from a few steps in that email, are answers to that question as it relates to America’s pay-as-you-go tax system:

“Step 1: Understand which IRS forms to fill out. One of the first things that employers will ask their summer help to do is fill out IRS Form W-4, “Employee’s Withholding Allowance Certificate.” Employers need this form to figure out how much tax to withhold from each employee’s paycheck.

Students who have never held a job before and thought that taxes didn’t need to be paid until April 15 will learn a quick lesson from the W-4: The federal income tax is a pay-as-you-go system in which individuals are required to pay tax on income as it’s earned during the year, usually by having their employer withhold tax from their paychecks.

It won’t be apparent when you fill out the W-4. But when the first paychecks are handed out, most students will find that their employers are withholding far more tax than they’ll actually end up owing. And although most students won’t end up paying a cent in tax on their summer earnings, relatively few students will be able to escape withholding……”

“Step 2: Understand withholding allowances. How much tax your employer withholds is based on how much you earn each payday, your marital status and the number of withholding allowances claimed on your W-4. Each allowance reduces the amount of tax withheld. ……. Unfortunately, most student workers will find they can claim only one allowance–a special allowance available to single individuals who have only one job….”

“Step 3: Understand if you are an employee or an independent contractor for summer work. Independent contractors don’t have income or payroll taxes withheld, so they (or their parents) may have an unpleasant surprise when a 1099 form arrives and taxes are due the following spring.”

“Step 4: Don’t forget about tips. Students who are working as waiters, bartenders, hotel bellhops or other jobs that tend to bring in tips from customers will have some additional withholding paperwork to fill out each month.

If you receive tips totaling $20 or more in a month at your job, you’ll need to report the tips to your employer by the 10th day of the following month. Your employer is required to withhold tax for whatever amount of tips you do report. This is usually done by withholding tax from your wages….”

“Step 5: Understand tax consequences of setting up your own summer business. Students who have set up their own summer businesses–be it mowing lawns or something else–don’t have to worry about withholding — withholding only covers wages earned by employees…..Instead, self-employed workers are supposed to make estimated tax payments to the IRS each quarter. But most students won’t have to worry about making quarterly estimated tax payments, either. That’s because there is no penalty for failing to make estimated tax payments if you end up owing less than $500 in tax for the year (after subtracting withholding and credits)….”

Definitely sound advice and direction for the first-time employee.