The availability of summer jobs for students and other youngsters is higher in 2011 that it was in 2010. The unemployment rate for people aged between 16 years to 24 years stands at 17.3% for 2011. This is lower as compared to the 2010 rate of 18%. However, the rates are still far from the 9.9% rate that existed prior to the economic meltdown in May 2007. Even beyond the decreasing rate of unemployment for younger people, there are also some tax incentives for those who plan to work over the summer. Therefore, look out for tax incentives and take full advantage of these. Some of the tax advice that a young worker can use for this summer are:
Under 18 and Hired by Parents
Children who are below the age of 18 and employed by their parents in their business will not pay both Medicare and Social Security taxes, irrespective of the wages earned. This is a huge tax savings for children and their parents as Social Security and Medicare accounts to about 13.3% of the tax amount paid. The wages paid to the children is an allowable business expense and therefore, the parents can deduct the payments from their business income taxes. However, the children are not liable for Federal Unemployment Benefits. Regular taxation rules will apply for children (who will have to pay taxes) if their annual wages exceeds $5,800.00, the 2011 minimum. If the children contributed to a qualifying retirement fund, the first $5,000.00 is also tax-free and therefore, they can receive payments of up to $10,800.00 without paying taxes (if they make the retirement contribution of $5,000.00).
Employee or Contractor?
One of the decisions pertaining to classification that one needs to make when taking up a summertime job is whether he or she will be an employee or a contractor. The IRS website gives clear guidelines as to who is an employee and who is a contractor. However, the general rule is that if the person working comes with his or her own tools for the work and determines how to do the work, then he or she is a contractor. Those who are given tools and are told what to do by the person who hires them are generally considered employees. Babysitters and house-workers will pass for employees while painters and plumbers will usually be contractors. For employees, withholding tax is applied to their wages while contractors receive their full wages and pay their own taxes. The threshold for withholding taxes for employees is $400.00 while the income tax threshold for those who pay their taxes directly is $5,800.00. For contractors, it would be wise put aside funds to pay their taxes to avoid surprises when taxes are due. They should also keep track of any deductible expenses, such as fuel mileage, uniform purchases, and qualifying equipment costs, so they can deduct these business expenditures when they file their taxes.
Retirement Fund Tax Incentives
All employees who take up jobs this summer can pay up to $5,000.00 to IRA accounts and get a tax deduction for the contributions. Any amounts paid above the threshold will be taxed at the regular tax rate that applies. For traditional IRA accounts, contributions are generally tax deductible while withdrawals are taxed. However, the Roth IRA works in an opposite fashion – the contributions are taxed, but the withdrawals are generally tax-free. Tax experts advise young workers to go for a Roth IRA, as their taxation rate is very low and they will get distributions from the retirement accounts tax-free.
Odd Jobs for Children Under 21
If a person below 21 years of age is employed by his or her parents for home jobs or jobs other than the parents’ regular business or place of work, then the income earned will not require any payroll or employment taxation. The parents cannot also claim any deductions from such payments.