Is your child looking for a job this summer? If so, you both may have questions about taxes.
Here's an overview of three common concerns:
Is a tax return required?
The answer depends on several factors, including the total amount of income received. For instance, if wages are the only source of income, your child can generally earn up to $5,350 during 2007 before a federal tax return is necessary.
However, unless your child can claim an exemption from withholding, a return may be required even when wages earned are lower than the filing requirement. That's because filing is the only way to claim a refund of overpaid taxes.
In addition, self-employment income, tips, and interest, dividends, and stock sales can affect the filing requirement.
Can my child open an IRA?
Anyone under age 70½ who has earned income can contribute to a traditional IRA. There's no age restriction for Roth accounts, though the amount of the contribution phases out at higher income levels (starting at $99,000 for single individuals in 2007).
If your child will receive a federal income tax refund, you could choose to have it deposited directly into an IRA account. As an alternative, you can provide the funds for an IRA and let your child keep the refund.
The maximum standard contribution for 2007 is $4,000.
Are there any tax breaks if my child works for me?
You can take a business tax deduction when you pay a reasonable wage for work your child performs in your sole proprietorship or a partnership you and your spouse operate.
In addition, as long as your child is under age 18, you don't have to pay social security, Medicare or federal unemployment taxes.
The wages are subject to income taxes.
If you have other questions about the tax implications of a summer job, give us a call. We're happy to help.
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