HERE are 10 tips for students with summer jobs:
1. Fill out Form W-4 (Employee’s Withholding Allowance Certificate). This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs, make sure all your employers withhold adequate amount of taxes to cover your tax liability.
2. Tips that you receive working as a waiter or camp counselor are taxable income and are subject to federal income tax.
3. Many students do odd jobs over the summer to make extra cash. Earnings you receive from self-employment – including jobs like baby-sitting and lawn mowing – are subject to income tax.
4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. You will receive credits toward your benefits under the Social Security system.
5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you are in the business of delivering newspapers under a written contract which states that you will not be treated as an employee for federal tax purposes.
7. You can earn about $9,750 in wages for 2012 and pay no income taxes, courtesy of standard deduction of $5,950 and personal exemption of $3,800.
8. You can even earn as much as $14,750 in wages, interest, and dividends but pay no income tax by contributing $5,000 to an IRA
9. There are education credits that can bring your total earnings to about $20,000 without paying any income tax.
10. If you are employed by your parents who do business as sole proprietors, they don’t have to withhold FICA (Social Security tax) if you are under age 18. This saves more than 15% of their gross wages. They also don’t have to pay FUTA (unemployment tax) if you are under 21.
Lesson for our students
While it feels good to put cash in your pocket while going to school, don’t go full time and neglect your studies. I have seen young promising children who do well at work, get promoted with better pay at their part-time jobs, but leave school to work full time. What you earn now is tiny compared to what you can earn later when you have a college degree.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.