Teens and young adults often go into business for themselves over the summer or after school. This work can include babysitting, lawn mowing, dog walking, or other part-time or temporary work. When teens or young adults are employees of a business, their employer withholds taxes from their paycheck. However, when classified as independent contractors or self-employed, they’re responsible for paying taxes themselves.
Here are six things to keep in mind:
- Everyone, including minors, must file a tax return if they had net earnings from self-employment of at least $400.
- If they owe taxes, teens and young adults should file their own tax returns, even if their parent or guardian claims them as a dependent.
- Teens and young adults can prepare and sign their own tax returns. There is no minimum age to sign a tax return.
- Parents can’t claim a dependent’s earned income on their own tax return.
- In addition to paying income tax, self-employed people are generally responsible for self-employment tax as well. This is the Social Security and Medicare taxes withheld from the pay of most wage earners plus the portion of these taxes the employer pays.
- Teens and young adults can lower the amount of tax they owe by deducting certain expenses.
What young entrepreneurs should do to keep on top of their tax responsibilities:
Keep records. It’s good to make and keep financial records and receipts during the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.
Pay estimated tax, if required. If teens or young adults are being claimed as dependents and expect to owe at least $1,000 in tax for 2023, they must make estimated quarterly payments. They should pay enough tax on time to avoid a penalty. They can use one of these forms to calculate their estimated taxes:
- Form 1040-ES, Estimated Taxes for Individuals
- Form 1040-ES NR, U.S. Estimated Tax for Nonresident Alien Individuals
If taxpayers also have a job where their employer withholds tax, they can request that their withholding be increased to cover their estimated taxes from their self-employed income. That way, they don’t have to pay estimated tax separately. The Tax Withholding Estimator on the IRS website is a great tool to help wage earners figure out how much they should withhold.
File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records, and e-file their tax returns. When preparing to file a tax return, they should review all their records, including any estimated tax they’ve already paid.
