It’s a rite of passage for teens to get their first summer job. Whether working in retail, hospitality, landscaping or another industry, make sure your child starts their employment off on the right foot using our tips below.
Completing your child’s Form W-4
When your child begins their summer job and will be paid as a W-2 employee, their new employer will require them to complete a Form W-4, Employee’s Withholding Certificate. The purpose of the form is to instruct the employer how to withhold income taxes from your child’s weekly paycheck. However, if your child’s expected wages will be small (less than $13,850 in 2023), then he or she will be allowed to claim an exemption from federal tax withholdings from their wages. To claim this exemption, they must meet the following qualifications:
- Last year your child had no federal income tax liability, and
- This year your child expects to have no federal tax liability again.
To claim this special exemption on the Form W-4:
- Complete Step 1 (name and address).
- Leave blank Steps 2, 3 and 4.
- In the space below Step 4(c), your child will write “Exempt”. By claiming “Exempt” no federal income taxes will be withheld from your child’s pay.
To learn more about how our child should claim Exempt on their W2, please watch our 3-minute video: Andrew Schwartz CPA on Kids Claiming Exempt on Their W4 Form – YouTube.
Assuming your child has no significant investment income and their wages earned will be less than $13,850 (the standard deduction for 2023), then there will be no federal tax liability for your child for 2023. (Although there will be no federal income taxes withheld from the paycheck, your child will still be subject to social security and Medicare taxes being withheld from his or her paycheck.) Additionally, if no federal income taxes are withheld, your child’s wages are below $13,850 for 2023, and there is no other income received by your child; then no federal tax return will be required to be filed by your child.
E-filing your child’s federal income tax return is quick, easy and free
If your child’s employer does withhold income taxes from your child’s pay and he or she is due a refund of all or a portion of the withheld taxes, your child can easily file a tax return the following year in order to get the withheld taxes refunded back. The IRS offers a free e-file link on their website that taxpayers can use to easily e-file their tax return when income is below $73,000. The IRS link to this free e-filing option is https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free.
Learning financial responsibility
Earning a weekly paycheck is a great tool for children to learn about financial responsibility. Receiving a weekly paycheck presents parents with the opportunity to teach their children about money management and savings goals. Set up financial objectives with your child based upon their weekly wages. Consider opening a savings account at your bank for your child that will be funded each week with a set percentage or set dollar amount of each paycheck received. Teaching the importance of building a small “nest egg” to be used for college or other personal expenses at a later date (books for school, a first car, entertainment, school related trips, etc.) will teach your child the value and responsibility of earning a regular paycheck and saving a portion for future financial needs. Also consider adding a “parent matching component” to your child’s savings objective to entice your child to save more – for every dollar they add to their savings account, you add 50 cents to their savings account as well.
Getting an early to start on retirement planning
If your child has earned income from a summer job, he or she will be eligible to contribute to an IRA under their name, even if no tax return is required to be filed by your child. The maximum IRA contribution amount for 2023 is limited to the lesser of the child’s earned income or $6,500.
In most cases, the income earned by your child will be free from income taxes, assuming total income for your child will be less than the standard deduction of $13,850; thus, in this situation there would be no tax benefit in contributing to a traditional deductible IRA. For that reason, the most effective long-term strategy would be to make the IRA contribution into a Roth IRA to benefit from decades of tax-free growth.
Please note that the Roth IRA contribution can be funded by the parents (or grandparents) as a gift to your child but must be funded into an IRA under the child’s name. The due date to fund your child’s Roth IRA for 2023 is 4/15/24.