Guidelines to determine if a teenager may owe taxes based on 2009 amounts.
If a teenager has earned income over $5,700 (in 2009), he or she will owe federal income tax. Earned income is from employment and the worker receives a W-2 (as an employee), a 1099MISC (as an independent contractor) or may be self-employed.
If a teenager has unearned income over $950 (in 2009), he or she will owe federal income tax on investment income. Unearned income is revenue from investments such as interest on a savings account, dividends from stock and mutual funds or capital gains distributions from mutual funds belonging to the teenager.
If a student has self-employment income over $400, he or she will owe self-employment tax. Self-employment income is the earnings from a business. Self-employment tax is the same a Social Security and Medicare taxes. The self-employment tax rate is 15.3% of net income.
If a teenager (under age 18 at anytime during the year and a student) was a household employee she does not owe self-employment tax. A household employee is a housekeeper, maid, baby-sitter, gardener, and others who work in or around a private residence as employees.
The tax return for a teenager may be confusing because there is more than one type of tax levied on the Form 1040. Both federal income tax and self-employment tax are calculated on the form. There is also more than one type of income that is taxed. The IRS has created separate forms and schedules for unearned income, self-employment income and investment income. The thresholds vary depending on the type of income and type of tax. Some of the thresholds are adjusted every year, but some have not been adjusted in decades, such as the $400 threshold on self-employment tax.
“The whole issue of teenagers and taxes gets complicated”
Teenagers wanting to start their own business need to be aware of the tax implications says Topp, who runs a website, http://TeensAndTaxes.com. “Even a small business selling crafts may pay three types of taxes: income tax, self-employment tax, and sales tax. I’ve met several teenagers that have small businesses and find that they may not owe federal income tax, but they do owe self-employment tax at 15.3% of their profits. This is a shocking wake-up call to a teenage entrepreneur.”
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Certified Public Account, Carol Topp, CPA operates an accounting practice specializing in tax preparation, micro business start ups, and non-profit accounting.