Under 18 years old full time student

[Pacun]

If (IF)

Client age 17 and full time student made $5K working in a restaurant and was withheld SS taxes, can he recover his portion of SS taxes withheld? It is my understanding that someone under 18 does not have to pay SS taxes if he makes less than $5,150. So employers don't know if that student will only make $5K and therefore they must withhold, but at the end of the year, we know exactly what he made (in this case, his only income was $5K from wages). It is clear to me that household workers don't pay ss taxes if under 18.

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[zeke]

If (IF)

Client age 17 and full time student made $5K working in a restaurant and was withheld SS taxes, can he recover his portion of SS taxes withheld? It is my understanding that someone under 18 does not have to pay SS taxes if he makes less than $5,150. So employers don't know if that student will only make $5K and therefore they must withhold, but at the end of the year, we know exactly what he made (in this case, his only income was $5K from wages). It is clear to me that household workers don't pay ss taxes if under 18.

Let's keep this forum active and participate by asking or answering.

lurk, lurk

[Lynn EA USTCP in Louisiana]

If (IF)

Client age 17 and full time student made $5K working in a restaurant and was withheld SS taxes, can he recover his portion of SS taxes withheld? It is my understanding that someone under 18 does not have to pay SS taxes if he makes less than $5,150. So employers don't know if that student will only make $5K and therefore they must withhold, but at the end of the year, we know exactly what he made (in this case, his only income was $5K from wages). It is clear to me that household workers don't pay ss taxes if under 18.

Let's keep this forum active and participate by asking or answering.

Is the student performing services for a private school? If yes, then his wages are exempt from social security and medicare withholding. If no, then any employer in the private sector (unless it is a schedule C owned by his parents) must withholding social security and medicare tax. See January 2007 Circular E, page 34.

Lynn Jacobs, EA

Kenner, LA

[jklcpa]

I agree with Lynn. I've never heard of this $5K limit.

Also, your client should make sure that the 17 year old's duties are not in violation of worker comp laws.

Ex: here in Delaware it's a violation to allow an under-18 worker to operate the french fry machine or meat slicer (at Arby's, McD's, grocery store deli) but they can be cashiers, servers.

[kcjenkins]

If (IF)

Client age 17 and full time student made $5K working in a restaurant and was withheld SS taxes, can he recover his portion of SS taxes withheld? It is my understanding that someone under 18 does not have to pay SS taxes if he makes less than $5,150. So employers don't know if that student will only make $5K and therefore they must withhold, but at the end of the year, we know exactly what he made (in this case, his only income was $5K from wages). It is clear to me that household workers don't pay ss taxes if under 18.

You are mixing two different things here, Pacun. And you have the cutoff amount wrong, too. If he's a 'household worker' then you are correct that he has some special rules, but working in a resturant is not considered a 'household worker'. A household worker is an employee who performs domestic services in a private home, local college club, or local chapter of a college fraternity or sorority. Code Section 3306(a)(3). Household workers may not be subject to FUTA. A person who employs household workers is an employer subject to FUTA tax if, during any calendar quarter in either the current calendar year or the preceding calendar year, that person paid cash wages totaling $1,000 or more to such household workers. Code Section 3306(a)(1). Of course, the worker does not pay the FUTA taxes, only the employer pays them, and they are not on the W-2.

They are subject to the other payroll taxes, however. Only exception I can think of for being exempt from FICA and MEDI is if it is employment by a school, under the special student worker rules. Work-study, for example.

Now, of course, those rules do NOT apply if the minor is working FOR HIS PARENT OR PARENTS, in a business that is solely owned by his parents, and not a corporation. It can be a partnership, but only if the partners are only his parents. If that is the case, then he is exempt from FICA and MEDI, and it is not limited to any specific $ amount.

[Pacun]

This is from a respected source and from a respected CPA. It is not clear to me and that's why I posted the question.

"Sometimes I can’t believe what other people believe. One of my tax clients honestly thought that if her teenage son was paid in cash, he didn’t owe any income tax. Another thought that teenagers, by virtue of being under age 18, didn’t owe income tax. Many parents think they can just add their teen’s income to their own income when doing a tax return. I have the unpleasant task of destroying their misguided beliefs, but I do tell them I will help determine if their teenager needs to file a tax return.

Do teenagers need to file a tax return?

The United States federal government income tax system is complex and so naturally there is no simple answer to this question. There are so many ways that teenagers can make money today. They can have a part-time job or even several jobs. They can be self-employed, like my daughter who is giving piano lessons. They can be what the IRS calls a “household employee” doing babysitting or mowing grass. Sometimes they are not employees but independent contractors, like my local newspaper carrier. Some teenagers have “unearned income” from savings accounts or investments in their name.

Here are some guidelines (based on 2006 amounts) to help you determine if a teenager may owe taxes.

If a teenager has EARNED income over $5,150 (in 2006), they owe federal income tax. Earned income is money from a job where the worker gets a W-2 (as an employee) or 1099MISC (as an independent contractor) or from being self-employed. The dollar threshold of $5,150 is adjusted annually.

If a student has UNEARNED income over $850 (in 2006), they owe federal income tax. Unearned income is income from investments such as interest on a savings account, dividends from stock and mutual funds owned in a custodial account, and capital gains for the sale of stock or mutual funds. The dollar threshold of $850 is adjusted annually.

If a student has SELF-EMPLOYMENT income over $400, he or she owes self-employment tax (called SE tax). Self-employment income is the profit from a business. SE tax is the same a social security (FICA) and Medicare for self-employed people. The dollar threshold of $400 has not been adjusted in decades.

If a teenager (under age 18 at anytime during the year and a student) was a HOUSEHOLD EMPLOYEE, he or she does not owe SE tax. A household employee is a housekeeper, maid, baby-sitter, gardener, and others who work in or around a private residence as employees. This income is reported on Line 7 of the 1040 along with W-2 wages, but includes a note “HSH” with the dollar amount of the household employee income earned.

These guidelines may be confusing because there is more than one type of tax covered on the Form 1040; both the income tax and SE tax are on the 1040. There is also more than one type of income that is taxed. There are forms and schedules for unearned income, self-employment income, investment income, etc. The thresholds vary depending on the type of income and type of tax. Some of the thresholds are adjusted every year, but some have not been adjusted in decades (like the $400 threshold on SE tax). The following are real life examples of teenagers earning money and their tax situation.

Real Life Examples

Earned Income - Lauren works at Sears and makes $3,100. Lauren does not owe federal income tax because her wages are under $5,150. She could file a return to get a refund of any federal and state income tax withheld. Lauren works two jobs and earns $6,000. She must file a 1040 with both her W-2s.

Household Employee - Emily earns $800 babysitting and $200 giving piano lessons. social security and Medicare taxes do not apply to the $800 because she is a household employee. Her $200 from teaching piano lessons is self-employment income, but under the $400 threshold requiring SE tax. She should still file a Schedule C (Profit or Loss from Business).

Kurt earns $2,000 mowing lawns for neighbors. Kurt will not owe social security and Medicare taxes because he is under 18 and a household employee. He will not owe federal income tax because $2,000 is under the threshold of $5,150 for federal income tax.

Self-employed Income - Kurt mows grass for a cemetery and gets paid $1,000 on a 1099 MISC. He is considered an independent contractor and will owe SE tax. He will not owe federal income tax because his income is under the $5,150 earned income threshold. Kurt should file a 1040 to pay his SE tax.

Phil does web design and earns a profit of $6,000. He owes SE tax, federal income tax, and, likely, state income tax.

Unearned Income - Tom has a large savings account. He earned $600 in interest. Tom does not have to file a tax return, nor does he owe any income tax because his investment income is under the $850 threshold for unearned income.

Tom’s dad manages his college fund. Tom is 17 years old. He sold stock for a capital gain of $5,000. Tom must file a 1040 and include Schedule D (Capital Gain or Loss) and Form 8615 Kiddie Tax. He will pay federal income tax at his parents’ rate.

His dad waited until Tom was 19 years old to sell the stock. Tom still files a 1040 and Schedule D, but now pays federal income tax at his rate of 5 percent. There is no Kiddie Tax!

Common Questions From Teenagers (and suggested answers)

I do a service job (i.e. lawn care or babysitting), do I have to pay taxes on what I make?

As long as you are under age 18 at anytime during the year and a student, your employer doesn’t have to pay social security taxes on you. You are also not considered self-employed. You will not owe federal income tax until you make over $5,150 (in 2006).

I want to start my own small business selling crafts. What do I need to report?

Congratulations on living the American dream of being your own boss! You are considered self-employed and will pay two types of taxes: income tax and SE tax. SE tax is the same as social security (FICA) and Medicare for self-employed people. You will report all your income and expenses on an IRS form called Schedule C, Profit or Loss from Business, when you file a 1040. Many teens who have small businesses find that they do not owe federal income tax, but do owe SE tax. (at 15.3 percent of their profits!). Keep good records of everything you earn and everything you spend on your business. It’s a really good idea to talk to an accountant when you start your business. He or she may also help you with issues like sales tax.

What if I get paid in cash?

According to the IRS, all types of earned income are subject to income tax. It doesn’t matter if you get paid by check from an employer (such as working at a fast food restaurant) or in cash by your neighbor (for mowing his or her lawn). How you are paid doesn’t matter to the IRS. The important point is that you report your income and pay tax on it if you are required to.

My new boss wants me to be an Independent Contractor, not an employee. What’s the difference?

Independent contractors are hired for a specific task or project (like plumbers), bring their own tools, may work for several clients, and do not need training. Examples of typical independent contractor jobs include sales, newspaper carriers, computer design, computer repair, entertainers, babysitting, and tutoring.

An independent contractor is a self-employed person and pays both halves of social security and Medicare taxes called SE tax. On the other hand, employees have half of their social security and Medicare deducted while their employer pays the other half. Teenagers may owe significant SE taxes at the end of the year even if they do not owe federal income tax!

The good news is that if you are an independent contractor, many expenses for travel, tools, equipment, etc. are deductible as business expenses (you must fill out a Schedule C Profit or Loss from Business)."

[Gail in Virginia]

Be careful about kiddie tax - your real life example has him pay tax at his own rate if he is 19, and that is correct for 2006. However, it is being changed to 18 or a full-time student under 24 claimed on parent's return. In that case, if the 19 year old is a college student still being supported by his parents, he will pay at their rate on his capital gains. I think that is effective for 2007, but I am not sure. Might not be until 2008.

[OldJack]

Although I did not read every word real close or check the dollar amounts for current year limits, I have no basic disagreements with the CPA's statements. I do question the household exemption of self employment tax on teenagers working at jobs such as lawn mowing work for neighbors. I would consider that as a Sch-C business subject to SE tax since age has nothing to do with independent contractor status. Under that broad theory of working for a homeowner, some tax preparers would be able to exempt a large portion of their tax preparation business from SE tax since they prepare the tax return with the client in the clients home. I think not.

[MAMalody]

<<<I do question the household exemption of self employment tax on teenagers working at jobs such as lawn mowing work for neighbors. I would consider that as a Sch-C business subject to SE tax since age has nothing to do with independent contractor status.>>>

I had that same reservation when I first read the article. In fact, I have decided to write the magazine about it. I noticed, what I considered an error in a clergy presentation a year or so ago, challenged it, and by jove, they issued a correction in the next issue. I didn't get any credit, but it was corrected.

Mike

[joanmcq]

I have problems with the household employee status too. If the kid only worked for one household, say as a nanny, yes, but mowing lawns for the neighborhood is SE IMHO.

[jainen]

>>mowing lawns for the neighborhood is SE IMHO<<

I'm inclined to agree, but I would not automatically preclude HH employee status. Multiple clients is only one factor to consider. If he has two or three that he works every week or two, riding the homeowner's mower with no special skills, under supervision, he wouldn't necessarily be an independent contractor for any of them. The article describes a relationship comparable to babysitting, which for a teenager is almost always most appropriately called an employee.

[kcjenkins]

I had the same reservations about the lawn-mowing, but if all his 'customers' are private homes, it DOES meet the household employee description, so he could get a pass.

Pacun, I hope this cleared up the $5120 issue, which is the limit for INCOME TAX, not for SE tax. Although there is that odd-ball exception to SE tax for a kid with a paper route. ;~) Isn't tax law fun?

[OldJack]

So if I only do tax returns at the home of my clients am I qualified as a HH employee? You guys know better than that.

[jainen]

>>So if I only do tax returns at the home of my clients am I qualified as a HH employee?<<

Paper-pushers are not exempt from the rules. The key issue is stated in the instructions to Schedule H: "This is true even if you gave the employee freedom of action. What matters is that you had the right to control the details of how the work was done." Obviously most tax preparers are employees, and if they worked in the home then that's the way it would be.

[Pacun]

Yes. KC. My question is clear now. Thanks.

Let's see... households have a need for nannies and for lawn mowers and they have made an exception for those "household jobs". There is no room for accounts or lawyers in those exceptions. So, no matter how you would argue, you will be a contractor if you visit your clients and do their taxes at their home.

[OldJack]

>>What matters is that you had the right to control the details of how the work was done<<

Well taxpayer/clients certainly have control of the details as they feed it to the tax preparer. Of course there are those tax preparers that like to be "creative".

I wonder how many households prepare W2's for their lawn service? I'll bet the IRS is just swamped with such W2's. LOL

[jainen]

>>households have a need for nannies and for lawn mowers... no room for accounts or lawyers<<

For some reason this reminded me of Philip K. Dick. In one of his futuristic novels he described the occupation of "witness," a kind of super-notary. The hero of the story has one who would certainly warrant a Schedule H.

Usually we think of domestic help as personal caregivers and property maintenance types. But some people have white collar workers like a secretary or an accounts manager.

[joanmcq]

Ahhh, the super rich. Yes, and personal assistants, etc.

Are you sure you're not thinking of Heinein's Stranger in a Strange Land's occupation of 'Fair Witness? Jubal Harshaw had a bevy of comely secretaries, one of whom was also a Fair Witness.

[jainen]

>>Heinlein's Stranger in a Strange Land's occupation of "Fair Witness"<<

Of course! Thank you -- obviously I myself would not be any good at that occupation.

[Gail in Virginia]

>>Heinlein's Stranger in a Strange Land's occupation of "Fair Witness"<<

Of course! Thank you -- obviously I myself would not be any good at that occupation.

I could not either - one of the main requirements was never let your statements be tainted by your opinions: facts only. I have way too many opinions and am way too free in expressing them! :lol:

[joanmcq]

I've just got no short term memory...don't think I could be any kind of witness much less a fair one!

[Julie]

But Jubal Harshaw was a self-employed writer who needed the secretarial service.....they wouldn't be Sch H, because they weren't (primarily) performing household services, but were employed in the normal course of his business.

[joanmcq]

But they also cooked dinner, brought him drinks......now the handyman would definintely have been a household worker. But would you have to split the women's pay between when they were 'front' and when they were cooking, etc?