Summer Jobs for Teens
The benefits and tax issues of a summer job
Gone are the days of Oliver Twist with the forced child labor. These days, there are plenty of summer jobs with most paying above minimum wage.
What taxes will teens owe
The three most common are federal payroll taxes for Social Security and Medicare (often referred to as FICA) federal income taxes, and state income taxes.
Federal payroll taxes for Social Security and Medicare go toward disability, retirement, and healthcare benefits. These payroll taxes apply from the first dollar of wages, and the rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). The employee only pays half that percentage while the employer pays the other half. These taxes go directly to the Social Security Administration and are never refunded.
Federal income taxes are based on the earned income for the full year. For 2022, no federal income tax is due on wages up to $12,950 earned by single people. Therefore, it is highly unlikely that your teen will owe federal income tax for working a 12 week summer job.
State income taxes are also based on income but rates and income brackets vary widely based upon your state of residence. You can check your state income tax details here.
Tax Savings for Teens
Once your teen understands that the FICA tax is gone forever, here are a few ways to help them save and retain more of their hard earned money:
- Even working 40 hours a week for 12 weeks during the summer at $!6/hour will not generate enough income to reach the Federal income tax limit. So rather than having income tax withheld and requiring a tax return to get their overpayment refunded, have your teen complete a W-4 with no Federal withholding. You can do the same if you state has a high income tax threshold.
- If you teen is responsible and loves being around you, there are some tax benefits of hiring them to work for your practice.
If you are still a sole proprietor (ie - you have not elected S-status), you can elect to not pay FICA payroll taxes on your teens wages. That is a tax break equal to 15.3% of their wages.
Even if you have elected S-status, paying your teen (for work that they must do) still creates the tax benefit of shifting income from your higher tax bracket to their low or zero rate.
- The best long term tax-savings strategy is to use the summer pay to fund a ROTH IRA retirement account. The ROTH IRA is a great deal for young workers as the after-tax contributions are allowed even if they paid no income tax and then the contributions grow until retirement when they can be withdrawn tax-free as well. If your teen contributed the 2022 ROTH IRA max of $6,500 and the funds earned just 7%, they would have $165,180 in tax-free money when they retire. So now the only issue is convincing your teen to give up their hard-earned cash that they won’t see again for almost 50 years. A few options here:
Threaten to disinherited them if they don’t follow your advice (not suggested).
Offer to match their ROTH IRA contribution dollar for dollar to help them build great savings habits.
Make a gift equal to their annual earned income to their ROTH IRA and let them keep all their earnings. The ROTH IRA contributions are limited to the teens earned income (maxed at $6,000) but it does not need to be the same earned dollars that are contributed.
So give your teen a stack of resumes and have them hit the pavement to find a great summer job that will help them grow their confidence, bank account and retirement savings.