A lot of young people find themselves going into business each summer. Jobs like babysitting, lawn mowing, and dog walking teach responsibility and the value of hard work. But they also might come with an unexpected tax bill, because – whether they realize it or not – many of these young entrepreneurs are self-employed, and their income may be taxable.
What you need to know
Things to keep in mind:
- Everyone, including minors, must file a tax return if they had net earnings from self-employment of at least $400.
- If they owe taxes, teens and young adults should file their own tax return, even if their parent or guardian claims them as a dependent.
- Teens and young adults can prepare and sign their own tax return. There is no minimum age to sign a tax return.
- Parents can’t claim a dependent’s earned income on their own tax return.
- In addition to income tax, people who are self-employed are generally responsible for self-employment tax as well. It’s like the Social Security and Medicare taxes withheld from the pay of most wage earners.
- Teens and young adults can lower the amount of tax they owe by deducting certain expenses.
What to do
Here’s what young entrepreneurs can do to keep on top of their tax responsibilities:
Keep records. It’s good to make and keep financial records and receipts during the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.
Pay estimated tax, if required. If a teen being claimed as a dependent expects to owe at least $1,000 in tax for 2022, they must make estimated payments on a quarterly basis. They should be sure to pay enough tax on time to avoid a penalty.
File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records and e-file their tax return. When preparing to file a tax return, they should make sure to review all their records, including estimated tax they’ve already paid.
This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.