© Copyright 2012 by Carol L. Topp, CPA
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Disclaimer and Limitation of Liability
This book is designed to provide accurate and authoritative information about the subject matter covered. The author is not rending legal, accounting, or other professional advice. Any tax advice contained in this book was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Furthermore, this book was not intended or written to support the promotion or marketing of any of the transactions or matters it may address.
The fact that a company, organization or website is mentioned does not mean that the author endorses the information or services provided. The resources mentioned in this book should be evaluated by the reader. Readers should also be aware that organizations and web sites mentioned may have been changed or ceased operations since the publication of this book.
Readers should be aware that tax laws, regulations, rates and dollar thresholds may have changed significantly since the publication of this book.
Table of Contents
Chapter 1: Why Are Taxes So Confusing?
Chapter 2: Real Life Examples to Clear the Confusion
Chapter 3: Taxes for Employees
Chapter 4: Independent Contractor: Fancy Title for a Job
Chapter 5: A Business Owner: Living the American Dream
Chapter 6: Household Employee: The New Title for Babysitter
Chapter 7: Watch Out for the Kiddie Tax
Chapter 8: Frequently Asked Questions
Chapter 1 Why Are Taxes So Confusing?
I am frequently asked if a teenager owes taxes. The simple answer is “Yes, any American earning income, regardless of their age, owes tax.” Unfortunately, the United States federal government's income tax system is complex and so, naturally, there is no simple answer to the question: do teenagers owe taxes?
The difficult question to answer is how much the teenager owes in taxes, because there are several types of taxes a teenager might pay and several exceptions to the tax laws. Additionally, there are many ways that a teenager can make money today.
They can have a part-time job or even several jobs.
They can be self-employed like my daughter who taught piano lessons.
They can be what the United States Internal Revenue Service (IRS) calls a “household employee,” doing babysitting or mowing grass.
Sometimes they are not employees but independent contractors like my web site designer.
Some teenagers have “unearned income” from savings accounts or investments in their name.
Types of Income a Teenager Can Earn
Here are some guidelines based on types of income, types of tax, and the tax code for 2011 to help determine if a teenager may owe taxes.
If a teenager has EARNED income over $5,800 (in 2011), he owes 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 $5,800 is usually adjusted annually. Chapters 3-6 cover taxes on EARNED income.
If a student has UNEARNED income over $950 (in 2011), he will 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 distributions from a mutual fund. The dollar threshold of $900 was last adjusted (increased) by $50 in 2008. Chapter 7 will cover unearned income and the infamous “kiddie tax.”