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Tips for Summer Jobs From the IRS

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With summer in full swing, many young folks are working in temporary jobs for the summer.  There are a few things that you need to know about these temporary jobs that the IRS (and I!) would like you to know.  Recently the IRS produced their Summertime Tax Tip 2012-13, which provides important information for students working in summer jobs.  I have added an extra couple of tips after the original IRS text that may be useful to you as well.

The original text of the Tip is below:

A Lesson from the IRS for Students Starting a Summer Job

School’s out, but the IRS has another lesson for students who will be starting summer jobs.  Summer jobs represent an opportunity for students to learn about the tax system.

Not all of the money they earn will be included in their paychecks because their employer must withhold taxes.

Here are six things the IRS wants students to be aware of when they start a summer job.

1.  When you first start a new job you must fill out a Form @-4, Employee’s Withholding Allowance Certificate.  This form is used by employers to determine the amount of tax that will be withheld from your paycheck.  If you have multiple summer jobs, make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability.

2.  Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income.  All tips you receive are taxable income and are therefore subject to federal income tax.

3.  Many students do odd jobs over the summer to make extra cash.  Earnings you receive from self-employment – including jobs like baby-sitting and lawn mowing – are subject to income tax.

4.  Even if you do not earn enough money to owe income tax, you will probably have to pay employment taxes.  Your employer will withhold these taxes from your paycheck.  If you earn $400 or more from self-employment, you will have to pay self-employment tax.  This payes for benefits under the Social Security system that are available for self-employed individuals the same as they are for employees that have taxes withheld from their wages.  The self-employment tax is figured on Form 1040, Schedule SE, Self-Employment Tax.

5.  Food and lodging allowances paid to ROTC students in advanced training are not taxable.  However, active duty pay – such as pay received during summer camp – is taxable.

6.  Special rules apply to services you perform as a newspaper carrier or distributor.  You are treated as self-employed for federal tax purposes regardless of your age if you meet the following conditions:

  • You are in the business of delivering newspapers.
  • All your pay for these services directly relates to sales rather than to the number of hours worked.
  • You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

If you do not meet these conditions and you are under age 18, then you are generally exempt from Social Security and Medicare tax.

My Additional Tips

In addition to the tips that the IRS has given above, I have two more tips to add to the list:

7.  If your income is going to be rather low, enough that you will not owe income tax for the year, you can use the special exemption provision, by writing “EXEMPT” in the box on line 7.  This is allowable if you had a right to a refund of all tax withheld last year (if applicable) and you expect a refund of all tax withheld this year (if any is withheld).  Using the exemption provision, your income will only be subject to withholding for Social Security and Medicare tax.

8.  Since most of the time summer jobs pay relatively low amounts, it can be especially advantageous to utilize a Roth IRA for saving some (or all) of your earnings.  You’re allowed to contribute the greater of your total income or $5,000 to a Roth IRA each year.  Since your tax rate on this summer income is low or possibly zero, this represents a very low cost way to fund a Roth IRA.  An added benefit is that funds in a retirement plan (such as a Roth IRA) are not counted toward federal financial aid calculations.  This can help out when you’re applying for financial aid for college.  See Roth IRA for Youngsters for more details.

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