Despite the fact that I’m writing this while wrapped in a quilt—thanks, Mother Nature—my calendar says that summer is coming. For many folks, that means new jobs, gig work, and summer camps. Those changes can result in tax consequences. Here’s what you need to know as summer heats up.
It looks like teenagers are returning to the job market this summer. With some schools already shutting their doors, teens are heading out—and into restaurants, pools, and other seasonal opportunities. According to the latest employment data, nearly 256,000 teens aged 16-to-19 years old picked up jobs in April, the highest number for that age group in over a decade.
All new employees, including seasonal workers, are required to complete a Form W-4. A W-4 is used to help an employer determine how much federal tax to withhold from your paycheck.
Form W-4 used to be quite confusing with loads of instructions. Now, it’s just a few pages long, with most of the additional pages reserved for taxpayers who have more than one job, dependents, or special circumstances. Single taxpayers with no dependents who work just one job need only fill in a few boxes and sign.
Teens may not need to withhold, but they’re not automatically exempt. If you’re a dependent, you may be able to claim exemption from withholding if you had no federal income tax liability in 2020 and you expect to have no federal income tax liability in 2021. This means that you will not be subject to federal income tax withholding. Your employer will still withhold Social Security and Medicare taxes, and any applicable state and local taxes. And, you may still have to file a tax return, even if you are exempt from withholding.
A quick warning: Despite videos circulating on TikTok, most taxpayers cannot avoid tax simply by claiming to be exempt. If you don’t have enough withholding, you’ll owe at tax time, plus be subject to penalties. If you have too much withholding, you’ll be entitled to a refund. The key is to find the right balance.
Working in the Family Business
Some kids, like mine, may spend summers working in the family business. Children under age 18 who work for their parents—so long as it’s a sole proprietorship or a partnership in which each partner is a parent of the child—may not be subject to social security and Medicare taxes. And children under age 21 who work for their parents may not be subject to Federal Unemployment Tax Act (FUTA) tax.
Children who work are subject to income tax withholding, as noted above, regardless of age. But remember that you can earn up to the standard deduction amount and owe no federal tax. That amount is $12,550 for single taxpayers in 2021.
Gig & Self-Employed Work
If you’re earning a little money on the side and you’re not an employee, you still need to consider the tax consequences. You won’t have to complete a Form W-4 and you won’t be subject to withholding, but you will still have to pay tax on your income.
Nonemployee compensation—money paid to freelancers, independent contractors, gig workers, and others who aren’t employees—is reported on Form 1099-NEC. If you’re confused, don’t be: That income used to be reported on Form 1099-MISC, but the IRS made the switch to the 1099-NEC in 2020.
If you receive self-employment or freelance income, you may need to make estimated payments. That will be the case if:
- You expect to owe at least $1,000 in tax for the 2021 tax year after subtracting any withholding and credits, and
- You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2021 tax return, or 100% of the tax shown on your 2020 tax return.
To figure your estimated tax, use Form 1040-ES. Payments are due quarterly: If you don’t pay enough tax by the due date for each quarter, you may be subject to a penalty.
You may be able to waive part or all of the penalty by filing Form 2210. This comes in handy when your income is uneven throughout the year, like seasonal employment during the summer. It can be tricky, so be sure to read the instructions or consult with a tax professional.
If your kids aren’t old enough to work—but you need to get hours in at the office—you’ve probably considered sending them to summer camp. Summer camp expenses may result in a tax break called the child and dependent care credit.
The credit can be up to 35% of your qualifying expenses, depending upon your adjusted gross income (AGI). Your total expenses will be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. The maximum amount of expenses used to calculate the credit for the year is $3,000 for one child or $6,000 for two or more children.
There are some restrictions. Notably, you must pay child and dependent care expenses so that you and your spouse, if married, can work or look for work. If you don’t have any earned income from wages, salaries, tips, other taxable employee compensation, or net earnings from self-employment for the year, you may not claim the credit.
While the cost of camp qualifies for the credit, most of the related expenses to send your child to camp don’t count towards eligible expenses. That includes sports equipment (even if it’s required) and clothing (even if your child would never, ever wear it outside of camp). You also can’t include the costs of commuting or other transportation.
However, some of the expenses involved in getting ready for camp are deductible. That includes physicals, vaccines and immunizations, and fees for doctors to complete forms for camp. If those are part of your medical care, they are deductible if you itemize on Schedule A and exceed 7.5% of your AGI.
If you don’t qualify to deduct medical expenses, consider paying those costs out of a tax-favored account like a health savings account (HSA) or health reimbursement arrangement (HRA).
It can be rewarding to find ways to write off expenses for tax reasons. But largely, you can’t deduct the cost of jars for catching fireflies or kayak rentals. And there are typically no tax breaks for barbecues, movies in the backyard, and days at the shore. I hope you’ll do them anyway: Enjoy your summer.
This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
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