School's Out for Summer!
With school out, many students have summer jobs, and students may not be aware that not all the money they earn necessarily makes it to their pockets.
Employers still must withhold taxes and some students may be considered "self-employed" and subject to self-employment tax.
Here are some things students need to be aware of about taxes and their summer jobs:
1. When you first start a new job, you will fill out a Form W-4, Employee's Withholding Allowance Certificate. This form is used by employers to determine the amount of tax that will be withheld from your paycheck.
If you have multiple summer jobs, make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability.
To make sure your withholding is correct, one tool you can use is the Withholding Calculator the IRS has at www.irs.gov.
TIP: In certain circumstances, it is possible to claim that you are "EXEMPT" from withholding. See the W-4 instructions to see if you qualify. If you do qualify, having no income taxes withheld from your check may save you from having to file an income tax return later on just to get your money back.
Note, however, that Social Security and Medicare taxes must be withheld by employers from all employee paychecks; there is no exemption for those taxes.
2. With some jobs, such as a waiter or bellman, you may receive tips as part of your summer income. You may think of these as tax-free income, but in reality all tips you receive are taxable income, and are, therefore, subject to income taxes.
3. Perhaps you do odd jobs over the summer to make extra money, jobs like baby-sitting and lawn mowing. This income is considered to be from self-employment, and like all other income is subject to income tax.
4. Speaking of self-employment income, if you have net earnings of $400 or more from self-employment, you have to pay what is called self-employment tax.
This tax pays for your benefits under the Social Security system. It is the same tax employers are required to withhold from their employees, but since you are your own employer, you have to pay it yourself.
The self-employment tax is figured on Form 1040, Schedule SE. So, even if you don't make enough money to owe income tax, you still may have to file a return anyway to figure and pay your self-employment tax.
5. ROTC students participating in advanced training are not taxable on food and lodging allowances paid to them. However, active duty pay, such as pay received during summer advanced camp, is taxable.
6. Finally, special rules apply to services you perform as a newspaper carrier or distributor. You are considered a direct seller and treated as self-employed for tax purposes if you meet the following conditions:
- You are in the business of delivering newspapers.
- All your pay for these services directly relates to sales rather than to the number of hours worked.
- You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.
Many students working only during the summertime do not make enough money to have to pay income taxes.
However, increasingly students find themselves labeled as "self-employed" and making more than $400 in net self-employment earnings.
When this happens, as stated above, a federal tax return is still required to be filed regardless of being exempt from income tax filing.
This is a situation that is increasingly catching students unaware; often not knowing about it until a letter from the IRS is received inquiring about why a tax return hasn't been filed.
