After all those years of mooching off of you, your teenager can finally earn some money this summer!
Of course, now you may have tax issues, but the upshot is she now has money in her pocket and is becoming a little more responsible.
Yet Another Return
If your dependent kid has a real job and gets a W-2, she probably will have to to file a tax return.
Remember, dependent means she resides with you for more than half the year, you provide more than half of her financial support and she is under the age of 19 or 24 if she's a full-time student.
But you can't just throw the income she made on your personal 1040 return. "The only things you can report on your own return are your kid's interest and dividends," reminds says Jackie Perlman, principal tax research analyst at H&R Block.
So if your kid takes that lifeguard job, she'll probably need to file her own return.
Quick Refresher: Earned vs. Unearned Income
Because nothing is simple with Uncle Sam, there are different rules for earned income vs. unearned income.
Earned income includes wages, salaries, tips, other forms of employee compensation and self-employment income.
Unearned income is income from everything else -- dividends, interest, investment income, survivor annuities and unemployment compensation.
So the IRS imposes different rules on your kid depending on whether she earned her income or not.
Basically, hard work (a.k.a. earned income) pays off. So your dependent child has to earn more than $6,350 in 2017 before there is a personal income tax return filing requirement (and maybe a tax bill). On the flipside, unearned income of $1,050 or more requires a return.
Here are the official IRS guidelines though.
Your kid must file a return if any of the following apply.
· Her unearned income was more than $1,050
· Her earned income was more than $6,350
· Her gross income was more than the larger of $1,050, or your earned income (up to $6,000) plus $350.
Beware of the Lemonade Stand
And then, presuming your dependent kid is unmarried, she can use Form 1040-EZ.
If you have a budding entrepreneur, be aware of self-employed taxes.
Your kid will have to file a Schedule SE if she has net self-employment income of $400 or more.
So let's say she has a booming babysitting business. If her income - minus any associated expenses - is at least $400, she will need to file that form.
Now you're thinking, "Wait, who's sending her a Form 1099? Certainly not the woman up the street whose kid she watches after school two days a week."
Agreed. But, in theory, she still is supposed to report all that income. And in case you need a reminder, there are some pretty solid reasons why you should not cheat on your taxes (e.g. jail).
Hire Your Kid
You absolutely can hire your child, but what you pay her should be in line with what she does, says Perlman. Basically it has to be legit.
And you can deduct her wages but you have to file a W-2.
The good news for you, the self-employed parent whose company is a sole proprietorship or a partnership, is that those wages are not subject to FUTA (federal unemployment) if she is under 21 and they are not subject to FICA/Medicare if she is under 18.
If your business is incorporated, then you're SOL and the regular employment tax rules apply.
Of Course There's an Obamacare Issue
Under the Affordable Care Act, parents are still responsible for making sure kids have health insurance. Well, if you're getting insurance from the Marketplace, remember that's based on household income. Well if Junior is working now, that income will fall into the overall family money pot and may affect your qualifications.
Just a heads up.
So while all this may sound onerous, it makes sense to file. "Because it could be that all the taxes withheld will be refunded if she's under the standard deduction [of $6,350]," says Perlman.
And then that makes for a happy kid come next April.