The United States federal government income tax system is complex and so naturally there is no simple answer to this question:do teenagers owe taxes? There are so 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 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 2011 amounts) to help you determine if a teenager may owe taxes.
- If a teenager has EARNED income over $5,8000 (in 2011), 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 $5,800 is adjusted annually.
- If a student has UNEARNED income over $950 (in 2011), they owe federal income tax. Unearned income is income from investments such as interest on 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 $900 was adjusted (increased) $50 in 2009.
- If a student has SELF-EMPLOYMENT income over $400, they owe 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, they do not owe Self-Employment 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 include a note “HSH” with the dollar amount of the household employee income earned.
These guidelines may be confusing. That is because there is more than one type of tax covered on the Form 1040. Both the income tax and self-employment 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 $400 threshold on self-employment tax).
Here are examples from real life of teenagers earning money and their tax situation.
Real Life Examples
Lauren works at Sears and makes $3,100. Lauren does not owe federal income tax because her wages are under $5,800. She could file a return to get a refund of any federal income tax withheld. She may file a state return to claim a refund too!
Lauren works two jobs and together earns $6,000. She must file a 1040 with both her W-2s. She will owe federal income tax and possibly state income tax.
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 to pay Self Employment 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 $5,700 for federal income tax (for 2009).
Kurt mows grass for a cemetery and gets paid $1,000 on a 1099 MISC. He is considered an independent contractor and will owe Self Employment (SE) tax. He will not owe federal income tax because his income is under the $5,8000 earned income threshold (for 2011). Kurt should file a 1040 to pay his Self Employment tax.
Phil does web design and earns a profit of $6,000. Phil owes Self Employment tax and federal income tax, and, likely, state income tax.
Tom has a large savings account. He earned $600 in interest. Tom does not have to file a tax return, nor owe any income tax because his investment income is under the $950 threshold for unearned income.
Tom’s dad manages his college fund. 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’ tax rate.