June 01 2017
By Gary Peiser
It is that time of year when school is out, and parents begin to encourage their children to get summer jobs. It not only puts extra money in their kids’ pockets, but it also teaches them valuable lessons and skills for a successful journey to adulthood. It also prepares them for the grown-up world of paying taxes.
Paying taxes can be confusing, especially for students who aren’t familiar with the rules and regulations set forth by the IRS. Therefore we put together a few tips for those students with summer jobs.
If you’re an employee and not a contractor, fill out your W-4 on day one. When you’re hired, your employer should give you this form as part of the onboarding process. This is an “Employee’s Withholding Allowance Certificate.” Without it, your employer can’t track your deductions appropriately. You might wind up stuck with a big bill at tax time if you’re not paying a little out of each paycheck.
If you’re a contractor and not an employee, consider paying estimated tax payments. If you do this on a regular basis, you can avoid owing a chunk of taxes on tax day — and don’t forget to ask for your 1099. If you’re self-employed, the entity that pays you should issue a 1099 at the start of each year for the previous year’s work. If you’ve been back in school for five months, you may have to get back in touch with last summer’s employer to get that form.
Remember that your summer job is only part of the picture. Know what you can and can’t deduct. As a working student, it’s important to know what you can and can’t deduct on your taxes to be sure you keep most of your hard-earned money. This E-file article provides a good starting point. You usually can’t deduct the costs of looking for your very first job, or for student housing and moving costs — but your parents may be able to take a tax credit of up to $2,500 or deduct up to $4,000 of your tuition costs from their taxes each year. If your parents do not claim you as a dependent, then you may be able to take the credit or deduction yourself.
Invest in a Roth IRA. If you’re able to put a few hundred (or a few thousand) dollars into a retirement fund each summer, that cash has decades between your college years and your retirement to compound into a much larger sum of money. A Roth individual retirement fund allows you to put away money towards your retirement that will be tax-free when you withdraw it. There’s only one catch: Parents or grandparents can’t help you contribute to reaching the annual $5,500 limit. All money deposited into that account has to come from your own earned income.
Understand the rules on payroll taxes and tips. In a summer job, you may make too little to be required to pay payroll taxes, but it’s your employer’s responsibility to file the paperwork and make the deductions from your paycheck anyway — it’s the law. Keep a daily tip log. Tips are treated the same as wages. So, if you make more than $20 in tips a month, you must declare and withhold on those tips.
The IRS has some excellent resources and guidelines online for working students. But we don’t recommend filing taxes for the first time on your own. We know what it’s like to do the work — and the paperwork — that doesn’t perfectly fit into the “Full-Time Employee Status” bucket. Let the tax professionals at GPP help you handle the details, so you can keep your attention on the work that counts.
Contact Goldin Peiser & Peiser to get answers to all of your tax questions.