Earning money as a teenager is an excellent way to start your journey towards financial independence. However, it’s crucial not to overlook the responsibility of paying taxes, just like adults do. Once your income reaches a certain threshold, you’ll be required to pay federal and state income taxes.
If you’re a teenager working a part-time job, summer job, or engaged in a side hustle, understanding when you become subject to taxes and how to handle tax payments is essential. Being informed about your tax obligations will help you manage your finances effectively and avoid any potential issues with the tax authorities.
Do Minors Have to File Taxes?
Whether minors have to file a tax return depends on their individual circumstances, and there isn’t a simple yes or no answer. Being a minor doesn’t automatically exempt teens from paying taxes, but it also doesn’t always mean they must file a separate tax return from their parents. In general, most U.S. citizens and permanent residents are required to file a tax return if their income exceeds a certain threshold for the year.
Two primary factors determine whether a minor must pay taxes or file their own tax return: their dependency status and their income level. These factors play a key role in determining their tax obligations and whether they need to file a separate tax return or be included in their parents’ tax return. It’s essential for teens and their parents to understand these factors to comply with tax laws correctly.
Dependency Status
Minors who meet the criteria to be considered dependents on their parent’s tax return usually don’t need to file their own tax return unless their income surpasses specific thresholds.
Typically, to be qualified as a dependent, a minor must:
- Be younger than 19 years old or under 24 years old if attending school full time.
- Reside with their parents for more than 50% of the year.
- Not provide more than half of their own financial support.
Dependents can be children or other qualifying relatives. For example, if a teenager moves out of their parent’s home and lives with a grandparent or an aunt, one of these relatives could claim them as a dependent if they meet the criteria mentioned above. Additionally, a dependent must be unmarried and meet certain citizenship or residency requirements, such as being a U.S. citizen, U.S. resident, U.S. national, or a resident of Canada or Mexico.
If a minor qualifies as a dependent, the next consideration is their income. As mentioned earlier, specific income limits determine whether a teen needs to file their own tax return.
Income Thresholds
The Internal Revenue Service (IRS) uses two types of income to determine whether a teen needs to file a tax return: earned income and unearned income.
Earned income refers to money earned from working, such as salary, wages, tips, and fees for services performed. For example, income earned from a part-time job at a fast-food restaurant or mowing lawns during the summer would be considered earned income.
Unearned income, on the other hand, comes from investments and includes interest, dividends, capital gains, rents, and royalties. It also includes distributions from a trust to trust beneficiaries.
For the 2022 tax year, the income thresholds are as follows:
- Dependents with earned income: $12,950
- Dependents with unearned income: $1,150
If a teen has both earned and unearned income, they need to combine the two to determine whether they need to file a tax return. In 2022, teens with both types of income would need to file if their combined gross income is greater than $1,150, or greater than their earned income (up to $12,550) plus $400.
For example, if a teen has $1,200 in unearned income and $13,000 in earned income, they would need to file a separate tax return because they pass both prongs of the test. However, if a teen had $200 in investment income and $600 in earned income, they wouldn’t need to file a return because their total income of $800 is below the $1,150 limit.
Filing a Return with a Part-Time Job
Teens working part-time jobs may or may not be required to file a tax return, depending on their income. If their income is solely earned and doesn’t exceed $12,950 for the year, and their parents claim them as dependents on their tax return, they generally don’t need to file a return.
However, it might still be beneficial for a teen to file if their employer withheld taxes from their paychecks during the year. In such cases, they could potentially receive a tax refund, getting back the money that was withheld. Filing a tax return allows them to claim any tax refunds they are eligible for.
What Income Isn’t Subject to Taxes?
The IRS classifies income as either taxable or nontaxable. Generally, any income received is considered taxable unless explicitly specified otherwise by the law.
Here are some common examples of nontaxable income:
- Inheritances, gifts, and bequests
- Cash rebates received from retailers, manufacturers, or dealers for purchased items
- Alimony payments received after a divorce finalized in 2018 or later
- Child support payments
- Most healthcare benefits
- Reimbursements from qualifying adoptions
- Welfare payments
- Life insurance death benefits
- Scholarships
Remember, even if a teen’s income is taxable, they may not be required to file a tax return if their earnings do not exceed the annual income limit.
When a Minor Has Capital Gains
Capital gains occur when an investment is purchased at one price and later sold at a higher price. Teens who have investments like stocks or mutual funds that generate capital gains may be subject to the kiddie tax.
To calculate the kiddie tax, parents (or teens) can use IRS Form 8615. You only need to include this form with a child’s tax return if all of the following conditions are met:
- The child’s income is solely from interest, dividends (including capital gains distributions), and it exceeds $2,300 for the year.
- The child was under age 18 at the end of the tax year, or 18 at the end of the tax year and didn’t have earned income providing more than half of their financial support.
- The child was a full-time student aged 19 to 24 who didn’t have earned income providing 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 income is solely from capital gains, interest, or dividends and the total is less than $11,500 for the year, parents have the option to report that income on their tax return instead of filing a separate one for their child.
How to File Your Taxes as a Teen
Filing taxes as a teen can be overwhelming, especially if it’s your first time. To make the process easier, follow this simple checklist:
- Figure Out If You Need to File Determine if you need to file a tax return based on your income and dependency status. If you earned income as a teen and your income exceeds the set threshold, you may need to file a tax return. If your parents claim you as a dependent on their tax return, the rules for filing can be different.
- Organize Your Information Gather all the necessary information to complete your tax return. This includes your Social Security number, W-2s if you had a job, 1099s for self-employment or investment income, and receipts for any deductible expenses related to your side hustle or business.
- Choose a Tax-Filing Software Consider using a tax-filing software program to guide you through the process. The IRS offers free tax software programs for filing your federal tax return. Keep in mind that some software may charge a fee for filing your state tax return.
- Complete Your Return With the tax software, start by entering your personal information and filing status (most likely “single”). Report your income, including wages and any other earnings. Choose between standard or itemized deductions, and check for tax credits that may apply to you. Review your return for accuracy, see if you owe taxes or are due a refund, and electronically sign and submit your return.
Remember, even if you owe taxes, file your return on time to avoid penalties and interest. Arrange to pay what you owe before the tax-filing deadline to avoid additional charges.
By following these steps and using tax software, you can navigate the tax-filing process with confidence as a teen taxpayer.
Do minors get taxes taken out of their paycheck?
As a teen working a job, if your employer asked you to fill out a Form W-4 when you were hired, they should be withholding taxes from your paycheck. This typically includes both federal taxes and state taxes, if applicable. On your pay stub, you should be able to see the different taxes being deducted along with their corresponding amounts. This helps ensure that the correct taxes are withheld and sent to the respective tax authorities on your behalf.
How much does a teenager get back in a refund on their taxes?
As a teenager, your eligibility for a tax refund depends on how you file your tax return – whether jointly with your parents or separately – and factors such as your reported income, eligible tax deductions, and credits you may qualify for. To estimate the potential refund amount, you can use an online tax refund calculator. By inputting your income and filing status, the calculator can provide an estimate of the refund you might receive when it’s time to file your taxes.
The Bottom Line
Filing taxes as a teenager can be straightforward if you know when it’s necessary to do so. Having a conversation with your parents about taxes and understanding when you need to start filing can help simplify the process. Additionally, discussing how to make the most of your tax refund, if you anticipate receiving one, can be beneficial. By staying informed and communicating with your parents, you can navigate the tax process more confidently.
