Getting A Summer Job? Here’s What You Need To Know About Taxes
This makes a good activity if many of your students work during the summer or school year. I used this article from Kiplinger as a primary source.
Step 1: Student worker will need to complete a W-4. Here’s a W-4 Calculator to help students get a feel for how much in taxes will come out of their paychecks. For W-4 Calculator, students should will need to know their gross wages and the frequency of pay. If they don’t know this, as long as they know their hourly rate and # of hours per week, they can calculate their weekly pay amount.
Two key points they will need to confront in filling out the W-4:
- Should they claim to be exempt from taxes? Spoiler alert: This tax stuff is never simple…from Kiplinger: “Generally, anyone with earned income of less than $6,300 in 2015 does not need to file a tax return. If he/she will earn less than that, your son/daughter could check the box on Form W-4 that allows him/her to claim he/she is exempt from withholding. Note, however, that a child who is claimed as a dependent by someone else cannot claim an exemption from withholding if he has more than $350 of unearned income (from interest and dividends, for example) and his total income is more than $1,050.”
- How many withholding allowances should they select? From Kiplinger: “Thomas often recommends that teens claim zero or one withholding allowance instead, in case they end up having enough earned income to owe some tax. “That minimizes the sticker shock of having a significant balance due,” he says.
Step 2: Consider using some of your summer earnings to set-up a Roth IRA. From Kiplinger:
Kids with summer jobs should also consider contributing to a Roth IRA; you just need earned income from a job to be eligible to contribute to a Roth, regardless of your age. “If parents want to really supercharge the saving and investing aspect of the summer job, they can push their children to establish a Roth IRA,” says Thomas. Your son/daughter doesn’t have to use his/her own money; you can give him/her the money to contribute. He/she can contribute up to the amount of money he/she earned for the year, with a maximum of $5,500. Starting a Roth when he’s/she’s young can give your son/daughter a huge head start for the future.
Here’s another great resource from Ron Lieber at the NY Times about Roth IRAs for young people.
Oh, and when they get that first paycheck, here’s a great NGP resource to help them understand how to decipher it.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.