Dear Bonnie: I’m 17 and I just landed a summer job at a restaurant on the Plaza. Do I have to pay taxes on the tips I’ll be getting? I’ve heard two different stories about that. Also, how many exemptions should I take on this W4 form I got from my boss? Thanks.
Hi Jason, thanks for writing. First of all, pretty much everything you make will be considered taxable income. This includes bonuses and commissions as well as tips. If you make more than $20 per month in tips, report the amount you make to your employer. He will calculate and withhold payroll taxes from your paycheck. Sometimes you’ll get tips in the form of cash and sometimes they will be added to a charge slip when the customer pays by credit card. Make sure there is no misunderstanding with your employer. He may already be recording and calculating the tips from the credit card receipts. You may only need to inform him of the cash tips you receive.
If the summer job is your only employment for the year, if it’s only going to yield you a couple of thousand bucks, and your parents will be claiming you as a dependent then when you fill out the Form W4, claim “exempt” on line 7.
According to the IRS, any money that you earn, no matter how old you are is subject to taxation. Kind of a drag, I know. So maybe you’re a hustler and you earn money from self-employment activities such as mowing lawns, designing websites, or babysitting. You must pay report the income on Schedule C of Form 1040. You will be required to file a tax return if the earnings exceed $400. If you make less than that, you don’t need to file.
You likely won’t owe any income tax but you will be required to pay self-employment tax, which funds your social security and Medicare accounts. Self-employment tax is computed at 15.3% of your profit. You may deduct any business expenses from the profit before paying the self-employment tax. It would behoove you to learn what expenses qualify as deductions. The IRS states that all “ordinary and necessary” business expenses can be deducted. Here are a few examples to help you make determinations:
1. You babysit for a family and you decide to take the kids to an amusement park at your expense. The amount you pay for admission, refreshments and other costs for the kids that aren’t reimbursed by their parents can be deducted as well as mileage if you drove them to and from in your own car.
2. You mow lawns and garden for your neighbor. At the end of the summer you buy him an azalea bush as a gift. This is a valid business expense.
3. You design websites and to do so you had to buy a laptop and special software. You may be able to deduct only a portion of the laptop if you did not use it 100% for business and you can write off the full cost of the software.
For more information on taxable versus nontaxable income, check out IRS Publication 525 Taxable and Nontaxable Income . If you’re a student, you might want to browse Tax Information for Students. And if you need to find out whether or not you are required to file a tax return, read Publication 501.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know.”