​Do You Need to File a Tax Return if You are Under 18?

You just started working your first job. Now, it is tax time. Do you need to file your taxes? It seems a lot of work because you did not make that much money. A surprise to many people, the IRS does not consider age as a factor regarding whether you must file taxes. The IRS looks at how much money you made, whether or not you are claimed as a dependent on someone else’s tax return, and what was the source of the income. When your children start earning money, it can have tax consequences for both the parents and children. If both you and your child claim them as a dependent, one of you will need to refile your taxes. A person can only be claimed as a dependent on one return. It takes careful planning, expert tax advice, and good communication to ensure the parents and children file their taxes in the most advantageous way possible.

Do You Need to File?

Taxes Owed on Earned Income

If you can be claimed as a dependent on someone else’s tax return, you must file a tax return starting in tax year 2018, if your earned income is more than $12,000. This is a huge change over prior years. In the past, the cutoff amount, when someone would need to file taxes for earned income, was the same as the amount of the personal exemption. In 2017, the personal exemption amount was $4,050. Under the New Tax Reform, the standard deduction was increased, which you can read more about here, and the personal exemption was eliminated.

Taxes Paid on Earned Income

If your employer took taxes out of your paycheck and you believe you do not owe them, it does not matter how much money you earned. You will need to file a tax return to have those withholdings refunded to you. For example, if your fifteen-year-old child worked at a local restaurant and earned $500, they may not be required to file taxes. However, if the restaurant withheld $100 from their paychecks in federal taxes, they would have to file taxes to get that $100 refunded to them; even though, they are not required legally to file taxes, because they made under $12,000. Although mistakes can be made, employers use a completed W-4, Employee's Withholding Allowance Certificate, form to determine how much tax they should be withholding from your paycheck each pay period. Usually, this form is completed as part of your new hire paperwork. Your employer, typically, will use the same information each year unless you update the form. It is important that you complete the W-4 form correctly for both federal and state. If you think you completed the form incorrectly and are having too much or too little taxes withheld, you can re-submit a new form. In the example above, a fifteen-year-old, who only is earning $500 a year should claim exempt from federal and state income taxes, so none are withheld. Tax experts can help you ensure it is completed correctly. If you completed the form incorrectly and wait until taxes are due to find out, the repercussions can be huge, if you are left with a large tax bill.

Taxes on Tipped Income

Tips received are taxable income, just like wages. The IRS requires tips received directly from customers to be reported monthly to your employer, if the tips received are more than $20 a month. The employer is required to withhold from the employee’s paycheck federal and state income tax, Social Security tax, and Medicare tax based on the tip income received. Although you do not need to report tips received to your employer, if they are less than $20 a month, you still need to report the full amount of tips earned on your tax return. Employers are required to pay half of the Social Security tax and Medicare tax on behalf of their employees. This process allows them to track the other half they should be paying of those taxes on your behalf. If employees fail to report their tipped income, the IRS can penalize them by requiring them to pay the full amount of the Social Security and Medicare taxes, rather than just their half.

Taxes on Unearned Income

If you earn income from interest, dividends, or capital gains, it is treated differently by the IRS than earned income. In part, the New Tax Reform simplified the so called “kiddie tax.” However, simplified does not mean lowered. Depending on your individual circumstances will depend on whether or not the tax was increased or decreased. Under the New Tax Reform, children’s unearned income is taxed at the rate for trusts and estates, which means children cannot benefit from the lower capital gains tax rate that applies to single taxpayers. The good news though is parents no longer must claim this income and have it taxed at their usually higher tax rate. Also, a child must earn more than $2,100 from interest, dividends, and capital gains, before they are required to file a tax return for unearned income only.

Taxes on Self-Employment Income

Regardless of your age, if you earn self-employment income over $400, you are required to file a tax return. Many employers are starting to pay part-time workers as contractors, issuing them 1099s, rather than as employees, issuing them W-2s. If you earn a small amount, this can be a good thing, as no taxes are deducted. However, if you earn a lot or this is a regular job, it can get complicated quickly. When you are self-employed or treated as a self-employed worker, you must pay self-employment tax. This tax is the full amount of the Social Security and Medicare taxes, since your employer is not paying half of them for you. The good news is you can deduct most of your expenses related to your work, including half of the self-employment tax. The bad news, you need to estimate your taxes and make quarterly payments to the IRS. If this is your first year getting paid with a 1099 or if your pay fluctuates greatly, this can get very complicated. To avoid penalties, interest, and fees, it is important to make the quarterly payments and file correctly.

The Bottom Line

It depends on what type and how much income you earn, not your age, on whether or not you must file a tax return. Regardless of your age, if you earn self-employment income, a combination of unearned and earned income, or receive extensive amounts in interest, dividends, or capital gains, it is better to seek the help of a tax professional. To determine whether or not you must file a return, make quarterly payments to the IRS, or should file a return to get a refund, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.