Earning money as a teen can be a great first step toward financial independence, but there’s one important thing you can’t afford to overlook: taxes. Just like adults, teens have to pay federal and state income taxes once their income hits a certain threshold.
If you’re a teen working a part-time job, summer job, or side hustle, it’s important to know when you’re subject to tax and how you’re expected to pay it.
Key Takeaways
- Teens may be required to pay income tax on the money they make once their earnings reach certain limits.
- In addition to the amount a teen makes, the type of income they earn can impact their tax liability and how much they might be expected to pay.
- Teens don’t need to file a separate tax return from their parents unless certain conditions apply.
- Different tax rules apply for teens who have earned vs. unearned income.
Do Minors Have to File Taxes?
There isn’t a definite answer as to whether minors have to file a tax return. That’s because it depends on a teen’s situation. Being a minor doesn’t exempt a teen from paying taxes, but it doesn’t necessarily mean they’re required to file a separate tax return from their parents.
As a general rule, most U.S. citizens and permanent residents need to file a tax return if they make more than a certain amount for the year. The two main factors that determine whether a minor has to pay taxes or file a separate tax return are their dependency status and their income.
Dependency Status
Minors who qualify as dependents on their parent’s tax return don’t have to file a separate return until their income exceeds certain limits.
To be a dependent, a minor must generally:
- Be under the age of 19 (or 24 if attending school on a full-time basis)
- Live with their parents for more than 50% of the year
- Not provide more than half of their financial support
Dependents can include children or other qualifying relatives. For instance, a teen who moves out of their parent’s home and lives with a grandparent or an aunt could be claimed as a dependent by one of these other relatives if they meet the rules above. Additionally, a dependent must be unmarried and a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico.
Assuming a minor meets the dependent test, the next step in determining whether they need to file a tax return is their income. As mentioned, specific income limits decide when a teen has to file their return.
Important
Parents can claim children over 24 as dependents if they’re totally and permanently disabled.
Income Thresholds
There are two types of income that the Internal Revenue Service (IRS) uses to determine when a teen has to file a tax return: earned and unearned income.
- Earned income is money made from working and includes salary, wages, tips, professional fees, and any other amounts received for work performed. So, if a teen is making money by working part-time at a local fast food restaurant or cutting grass on the weekends in the summer, that’s earned income.
- Unearned income is income from investments and includes interest, dividends and capital gains, rents, royalties, etc. The IRS also considers distributions of interest, dividends, capital gains, and other unearned income from a trust to trust beneficiaries to be unearned income.
Here are the income thresholds for each type of income for the 2023 tax year:
- $13,850 for dependents with earned income
- $1,250 for dependents with unearned income
Now, things can get a little confusing if a teen has both earned and unearned income. In that case, they would need to add their earned and unearned income together to see if it triggers a tax filing requirement. For 2023, teens with both types of income would need to file if their combined gross income is greater than $1,250, or greater than their earned income (up to $13,450) plus $400.
Let’s say that a teen has $1,300 in unearned income and $14,000 in earned income. They would pass both prongs of the test and would need to file a separate return. Now, say that a teen had $200 in investment income and $600 in earned income. In that case, they wouldn’t need to file a return since their total income of $800 ($600 in earned income + $200 unearned) is below the $1,250 limit.
Note
Self-employed teens are required to file when their income from self-employment equals or exceeds $400 for the year.
Filing a Return with a Part-Time Job
Teens who work a part-time job may or may not need to file a tax return, depending on their income. If they only have earned income for the year, their income does not exceed $13,850, and their parents claim them as dependents on their tax return, then they don’t need to file.
However, it may still be a good idea for a teen to file if their employer withheld taxes from their paychecks throughout the year. In that case, they could get all of that money back in the form of a tax refund.
Teens who get a tax refund could use some or of all that money to set up a custodial individual retirement account (IRA) for their retirement, with their parents’ help.
What Income Isn’t Subject to Taxes?
The IRS distinguishes between taxable and nontaxable income. Any amount of money included in income is generally taxable unless otherwise specified by law.
Here are some of the most common types of nontaxable income:
- Inheritances, gifts, and bequests
- Cash rebates on items you purchase from a retailer, manufacturer, or dealer
- Alimony payments you receive if you divorced after 2018
- Child support payments
- Most healthcare benefits
- Reimbursements from qualifying adoptions
- Welfare payments
- Life insurance death benefits
- Scholarships
Again, keep in mind that even if a teen has taxable income, they don’t necessarily need to file a tax return if their income doesn’t exceed the annual limit.
When a Minor Has Capital Gains
Capital gains occur when you buy an investment for one price, and then sell it at a higher price. If a teen has investments that produce capital gains, such as stocks or mutual funds, they may be subject to what’s called the kiddie tax.
Parents (or teens) can use IRS Form 8615 to figure out the kiddie tax. You only need to include this form with a child’s tax return if all of the following conditions are met:
- A child’s only income is from interest and dividends (including capital gains distributions), and that income exceeds $2,500 for the year.
- The child was under age 18 at the end of the tax year, or was 18 at the end of the tax year and didn’t have earned income that provided more than half of their financial support.
- The child was a full-time student age 19 to 24 who didn’t have earned income that provided more than half of their financial support.
- At least one parent was alive at the end of the tax year.
- The child is required to file a tax return for the year and is not filing a joint return.
If a teen’s only income comes from capital gains, interest, or dividends and the total is less than $12,500 for the year, parents can elect to report that income on their tax return instead of filing a separate one for their child.
Parents and teens may benefit from talking to a tax advisor or financial advisor about the best way to handle the kiddie tax if it applies.
How to File Your Taxes as a Teen
Filing taxes as a teen isn’t that different from filing taxes as an adult, but it can be a little overwhelming if it’s your first time. Having a simple checklist to follow can make the tax-filing process easier.
Step 1: Figure Out If You Need to File
As mentioned, making money as a teen doesn’t always mean you have to file a tax return. Knowing what kind of income you have (earned or unearned) and how much you made for the year can help you figure out whether or not you need to move ahead with filing a return.
If you worked a job that required you to complete a Form W-4, you should get a W-2 form in the mail from your employer sometime in January.
That form will break down your income for the year. If you were self-employed, then you’ll need to add up your income yourself to see what you made, unless you were an independent contractor. In that case, the person or business you did contract work with would send you a Form 1099 showing your income.
Investment income is reported on Form 1099 as well, but the form you get will depend on what kind of income it is. For example, you’ll get Form 1099-DIV for dividends and Form 1099-INT for interest income.
Step 2: Organize Your Information
If you know you’ll need to file a tax return, the next step is rounding up all the information you’ll need to complete a return. That includes:
- Your Social Security number (SSN)
- W-2s, if you worked a job
- 1099s from self-employment
- 1099s for investment income
Teens with a side hustle or business will also need to organize receipts for any expenses they plan to deduct. A teen who runs a lawn care business in the summer could write off things like gas or oil, but to do that, they would need receipts for those purchases.
Step 3: Choose a Tax-Filing Software
You could fill out a paper tax form, but that can take a lot of time and get confusing if you’re not sure what goes where. The easier way to file taxes as a teen is to use a tax software program that walks you through everything you need to include.
The IRS offers a list of tax software programs that you can use to file your federal tax return for free. Keep in mind that if you use the same program to file your state tax return, you might have to pay a separate fee for that.
For the 2023 tax year, eligible taxpayers can file their federal tax returns for free directly with the IRS through the Direct File program. This pilot is only available to people who lived in the following states in 2023:
- Arizona
- California
- Florida
- Massachusetts
- Nevada
- New Hampshire
- New York
- South Dakota
- Tennessee
- Texas
- Washington state
- Wyoming
You can verify whether you are eligible to use Direct File by referring to the IRS website.
Step 4: Complete Your Return
Once you choose a tax-filing software, you can get to work filing your return. That could take a few minutes to a few hours, depending on how complicated your filing ends up being.
Here’s what you can expect to do to file your return:
- Start with the basics. Enter your personal information, including your name, date of birth, and SSN.
- Choose a filing status. Your filing status tells the IRS which tax rates to apply to your income. Unless you’re married, you’ll choose single here.
- Report your income. At this step, use your W-2s to enter information about your employer, income, and the amount of tax you paid for the year. This information is included in different numbered boxes on your W-2, but your tax software program should tell you where to find it. The program should also prompt you to enter other income, including money you made from self-employment or investment income.
- Choose your deduction. The options are standard or itemized. A deduction allows you to subtract a certain amount of money from your taxable income. The IRS gives you a choice of standard or itemized deductions. Most teens will choose the standard deduction unless they run a business and have a lot of expenses that they want to write off.
- Check for tax credits. Tax credits reduce what you owe in taxes dollar for dollar. Tax-filing software programs usually have built-in checks that will review your return for you and look for any credits that you might be eligible to claim.
- Sign and submit. If you’ve entered all of your information, you’ll have a chance to review your return and make sure everything is correct. At this point, you should be able to see whether you owe taxes or are getting a refund. If you’re getting a tax refund, you’ll need to tell the IRS where to send it by entering your bank account information. (Direct deposit is the fastest way to get your tax refund if you’re owed one.) Once you’ve done that, you can electronically sign and submit the return.
After you file your federal return, you might be asked if you want to file your state return as well. If you decide to do that, the program can transfer your information over and complete your state return in a matter of minutes. You can then review it, see what you owe or stand to get back, sign it electronically, and submit it.
What if you owe taxes? You should still file your return, but you’ll need to arrange to pay what you owe by the tax filing deadline. If you don’t pay on time, the IRS can charge penalties and interest, which can add to the total you owe.
Do Minors Get Taxes Taken Out of Their Paychecks?
If you’re working a job as a teen and your employer requires you to complete a Form W-4 at hiring, then they should be taking taxes out of your paycheck. That includes both federal taxes and state taxes. Somewhere on your pay stub, you should see the various taxes that are being deducted and the amounts listed.
How Much Does a Teenager Get Back in a Refund on Their Taxes?
Whether you can get a tax refund as a teenager depends on whether you file a tax return with your parents or separately, how much income you have to report, and which tax deductions or credits you might qualify for. Running the numbers through an online tax refund calculator can help you estimate how much you might be able to get back at tax time if you know your income and filing status.
Do You Have to Pay Taxes When You Turn 18?
You have to pay taxes when you have taxable income, regardless of age. Turning 18 doesn’t automatically mean you’ll have to start filing a tax return or that you’ll have to file your income on your parents’ return. However, the Internal Revenue Service (IRS) generally requires you to file a tax return once your income exceeds a certain limit for the year. You may not owe taxes, but you could miss out on collecting a refund if you don’t file.
Do High School Students Have to File a Tax Return?
High school students may have to file a tax return separately from their parents if their income exceeds certain limits for the year. Whether a teen needs to file their own return will depend on the type of income they have (earned or unearned) and how much money they make for the year. Generally, it’s more common for teens who work or have a side hustle to file their income with their parents’ return.
The Bottom Line
Filing taxes as a teen doesn’t have to be confusing if you understand when you’re required to file. Talking to your parents about taxes and when you’ll have to start paying can make the process easier to navigate. You can also discuss the best ways to use your tax refund if you expect to get money back.
Read the original article on Investopedia.