Most people’s knowledge regarding taxes comes down to two things: Everyone has to pay them, and nobody likes to. However, as Benjamin Franklin famously said, taxes are one of life’s two certainties, making it an important topic for young people to get a grasp on.
While there’s no need for parents to turn their teen into a budding CPA (unless accounting is their passion!), there are some general things teens should be aware of when it comes to taxes.
SCHEDULE C: Self-Employment=Taxes
Not every teen receives a paycheck with a business’s name printed at the top. Plenty of enterprising young people earn money by offering their services as babysitters, lawn mowers, snow shovelers and other similar activities. Other teens may decide to make and sell items, such as handcrafted jewelry or birdhouses.
In cases where a teen is self-employed, it may be necessary to file a Schedule C form along with their 1040. Schedule C, Profit or Loss from Business, is used to report income or loss from a business that an individual operates or a profession they practice as a sole proprietor, meaning a business owned and run by one person. Any activity whose primary purpose is generating income or profit and which is used on a regular basis qualifies as a business. Therefore, helping out a neighbor by raking their leaves or babysitting their kids every now and then is not the same as running a business. However, if a teen continually and regularly offers lawn care services to various customers or babysits frequently to earn money, they are self-employed.
Many young people may believe that getting paid in cash makes them exempt from paying taxes, but the IRS isn’t interested in how an individual is paid, only how much income they receive. While a young person claimed as a dependent will only owe federal income tax if they make more than $5,950 in a given year, any individual whose net earnings exceed $400 will owe self-employment taxes. It’s with this in mind that self-employed teens should take care in keeping detailed records of exactly how much income they receive, and from where.
Additionally, parents should keep in mind that they can’t claim a child’s earned income as their own. Only unearned income from a child, such as interest, can be included on a parent’s tax return.