NEW YORK (Tribune Media Services) - When teenagers get their first paychecks from their summer jobs, many are likely to be disappointed by the amount of tax withheld by their employers.
Many students will be unhappy to find their employer withholding far more tax from their paychecks than they'll actually end up owing. Also likely to be disappointed are students who didn't realize that their wages are subject to more than income taxes.
Here is a guide to the tax aspects of minors' summer jobs.
Income tax bite
Most teens -- especially those who work only during the summer months -- will end up paying relatively little, if any, income tax on their summer wages next tax season. Their standard deduction can be used to completely shelter from income tax the first $4,700 in wages earned in 2002. Students who work only during the summer will likely find the standard deduction big enough to shelter all their summer earnings from tax.
Students who work part-time during the school year, as well as the summer, will likely earn far more this year than the standard deduction will protect. But the excess will generally be taxed at low rates. The first $6,000 in taxable income is taxed at a 10 percent rate. Amounts from $6,000 to $27,950 are taxed at a 15 percent rate.
Even if you expect to escape income tax on your summer wages, your employer may still end up withholding some income tax from your paychecks. That's because the withholding requirements are tougher than the actual tax treatment of youths.
When you report to your summer job, your employer will ask you to fill out IRS Form W-4 ("Employee's Withholding Allowance Certificate"). Employers use the form to help figure how much tax to withhold. On the form, you can claim exemption from withholding only if you didn't have any income tax liability last year and don't expect to have any income tax liability this year.
As a result, some students who work only during the summer and don't expect to owe any income tax on their summer wages will end up being subject to withholding because they owed some income tax last year, or because they expect to earn more than moderate amounts of investment income. As a general rule, student workers can use their standard deduction to shelter no more than $250 in investment income from tax.
The only students who might be eligible to claim exemption from withholding are those who expect their investment income this year to total no more than $250 and their total 2002 income (wages plus investment income) to be $4,700 or less. If you are eligible to claim exemption from withholding, write the word "EXEMPT" on line 7 of the W-4 form.
If you can't claim exemption from withholding, you can minimize the amount of tax withheld from your paychecks by claiming any withholding "allowances" you're entitled to on the W-4 form. The more allowances you claim, the less tax your employer will withhold. But most students are eligible to claim only one allowance -- a special allowance available to single individuals who have only one job. (This allowance is listed on Line B of the "Personal Allowances Worksheet" that is attached to the W-4.)
Of course, if you end up having more income tax withheld than you owe, you'll be able to get a refund next tax season when you file your 2002 income tax return.
Social security taxes
Teens may be generations away from collecting Social Security and Medicare benefits. But the wages of minors, just like those of adults, are subject to Social Security and Medicare taxes. That's why student workers will find 7.65 percent of their wages withheld from their paychecks to pay their share of Social Security and Medicare taxes.
Employers are obliged to withhold these taxes, even if a student claims exemption from withholding. The withholding exemption applies only to income tax.
There will be additional withholding paperwork for students working as servers, or for students working other jobs in which customer tips are customary.
If you receive tips totaling $20 or more in a month while working at a particular job, you'll need to report the tips to your employer by the 10th day of the following month. For example, tips you earn in June will have to be reported by July 10. If you earn less than $20 in tips during a month, no report is required for that month, although you'll still have to report the tips on your income tax return.
The monthly report is normally made on Form 4070, "Employee's Report of Tips to Employer." Most employers make the form available to employees. The form is included in IRS Publication 1244, which contains a log you can use to keep a daily record of tips for the month.
Your employer is required to withhold tax on whatever tips you do report. Employers usually accomplish this by deducting the tax from your wages.