Working This Summer? Students Need to be Tax Savvy, Too

In these difficult financial times it is common for college students to engage in some part-time work while juggling regular semester coursework or, at a minimum, take that obligatory summer job.

Any level of paid remuneration will trigger a potential tax liability for the student, and in some cases involving unearned income, the parent may wind up paying the tax, according to Rick Marmon, an associate professor of accounting in the Rohrer College of Business at Rowan University, Glassboro, N.J. who holds advanced degrees in business, law and tax and is a certified public accountant, certified management accountant and licensed attorney.

There are a couple of planning considerations that anyone with working kids should know that will help make reporting a little less taxing in the new year, said Marmon, who teaches taxation courses in the undergraduate and graduate business programs.

First, children under the age of 24 who are full-time students at least some part of five months during the year are generally considered dependents of their parents. Dependents are not entitled to reduce their taxable income by their personal exemption ($3,650 for 2010), which means that once a child earns more than $5,700 (his/her standard deduction), he/she will have a tax liability.

One thing that a working youth should do is file a W-4 with his/her employer exempting him/her from tax withholding if his/her projected earnings are less than $5,700. There is little need to waste time and money filing a tax return when the child ultimately will get a refund of all taxes withheld during the year, Marmon said.

Second, if a child has unearned income exceeding $1,900, he/she will have to pay tax on the excess at his/her parent’s marginal tax rate. This provision was added to the Internal Revenue Code to prevent parents from reducing their taxes by putting their stocks and CDs in their childrens’ names. The “kiddie tax,” as it is known, applies to children under 18 years of age or under age 24 who are full-time students and whose earned income does not exceed half of their support (excluding scholarships).

Another issue involving working kids is the dreaded “self-employment tax.” If a child is engaged in some type of work that is considered self-employment income and he/she earns more than $433, he/she must pay a 15.3-percent self-employment tax in addition to any federal income tax required. Self-employment income includes any money earned that is not reported on a W-2 by an employer. For instance, that summer lawn business or odd-job business is subject to self-employment tax; however, babysitters have been held to be employees of the parents for whom they are working and are not subject to the tax.

In addition to the federal tax issues, most states require some form of reporting and/or tax obligation for student workers. Addition detail and instructions can be found in IRS Publication 929: Tax Rules for Children and Dependents.