Now is the time to prepare for the less pleasant part of having a summer job: paying taxes! Here’s what you can expect depending on the type of job you have this summer.
The employee. Employment in a retail store or restaurant generates earned income that is subject to payroll and income tax. Paying taxes as an employee is very simple, as all necessary taxes will be withheld from your salary. You may have to file a tax return if wages and tips exceed $12,950, which is the standard deduction for single taxpayers in 2022.
The family business. Employment in a family business will also generate earned income subject to payroll and income tax. If you are under 18, receive reasonable compensation for legitimate employment, and the business is either a sole proprietorship or an LLC, you may qualify for exemption from Social Security, Medicare, and federal unemployment contributions.
The contractor. A job like mowing lawns, working on computers or walking a dog will generate earned income subject to income tax. You will also have to pay a 15.3% self-employment tax on all profits. Paying taxes as an entrepreneur or business owner also involves making payments to the IRS, either electronically or by check, throughout the year.
The housekeeper. Performing tasks such as babysitting and cleaning for neighbors can trigger the housekeeper rules, also known as the nanny tax. This may be good news, as these jobs are generally exempt from Social Security and Medicare taxes when paid to workers under the age of 18 who are considered domestic workers.
What do you need to do
Here are some suggestions for understanding how taxes will affect your summer job:
Explain how taxes are withheld. If you are an employee, take one of your paychecks and review how each dollar amount is calculated. It will also help you understand the different types of taxes, including federal and state income taxes, social security taxes, and health insurance taxes.
Create a savings account. If you have your own business, you will need to set aside a certain percentage of the money you earn to pay the IRS. A simple way to do this is to transfer some of the money to a savings account. Pay attention to the estimated quarterly due dates throughout the year – April 15, June 15, September 15, and January 15. These are the deadlines for sending tax payments to the IRS.
Reduce your tax bill. Consider opening an IRA that can help you start saving for the future while potentially reducing your taxes. It helps to establish healthy saving habits while understanding that it is possible to pay less taxes!
Please call 425-640-8660 if you have questions about taxes and how they apply to your summer job.
— By Nancy J. Ekrem, CPA
DME CPA Group PC
Chartered Accountants and Business Consultants