Taxes Take No Summer Break!
School's out and many students have summer jobs to keep them occupied and make them some extra green. While most students would never give it another thought, summer jobs may create an unexpected tax liability for them.
So here are a few tips for students who are pulling in some extra cash this summer. If nothing else, look at it as representing an opportunity for students to continue their education by learning about the tax system!
First of all, if you (the student) haven't noticed yet, not all of the money you earn will be included in your paycheck because your employer must withhold taxes. At a minimum, employers have to withhold Social Security and Medicare taxes from the paycheck.
When you first start a new job, you will have to fill out a Form W-4, Employee's Withholding Allowance Certificate. This form is used by your employer to determine the amount of tax that will be withheld from the 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.
Here's a little tip, however. If you had no tax liability in the previous year and do not expect to have one this year, you may write "EXEMPT" on line 7 of Form W-4 and have not income taxes withheld from your pay. Be careful, though, because if you end up owing tax, you will have to cough it up later when you file your tax return.
Speaking of tips, whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. That's great news, but remember that all tips you receive are taxable income and are therefore subject to federal and state income tax.
For many students, a regular paying job isn't in the cards but rather they do odd jobs over the summer to make extra cash. If this is you, you are considered self-employed. Earnings you receive from self-employment - including jobs like baby-sitting and lawn mowing - are subject to income tax.
But there is a wrinkle when it comes to such self-employment income. Even if you do not earn enough money to owe any income tax, if you are considered self-employed, you will probably have to pay employment taxes.
For a regular job, your employer withholds these taxes (Social Security and Medicare taxes) from your paycheck. If you earn $400 or more from self-employment, however, you will have to pay this in yourself by paying what is called the self-employment tax.
Self-employment tax pays for benefits under the Social Security system that are available for self-employed individuals the same as they are for employees that have taxes withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE, Self-Employment Tax, and has to be paid even if no income taxes are owed.
Finally, there are a couple of special tax rules that only apply to those doing specific jobs, but I'll present them here just in case they may apply to you.
First, food and lodging allowances paid to ROTC students in advanced training are not taxable. However, active duty pay, such as pay received during summer camp, is taxable.
Also, special rules apply to services performed as a newspaper carrier or distributor. You are treated as self-employed for federal tax purposes regardless of your age 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.
If you do not meet these conditions and you are under age 18, then you are generally exempt from Social Security and Medicare tax.
So, enjoy your break from school and by all means earn as much as you can, but be aware that a day of reckoning with the tax man may be coming!
