This is an excerpt from Teens and Taxes 2009 Edition by Carol Topp, CPA. The entire
ebook is available at TeensAndTaxes.com
Chapter 2
Real Life Examples to Clear the
Confusion
Chapter 1 may have left you a bit confused. There are many ways a teenager can make
money and sometimes they will owe taxes and sometimes they will not. Some examples
will help.
As a quick overview, there are several types of income, each with their own threshold.
Type of Income
Type of Tax
Threshold for 2009 and 2010
Earned
Income tax
$5,700 adjus ted annually
Unearned
Self Employment
Income tax
Income tax and
Self Employment tax
$950
$5,700 adjus ted annually
$400 not adjusted
Household Employee
Income tax
$5,700 adjus ted annually
Earned Income
Lauren works at Sears and makes $3,100. Lauren does not owe federal income tax
because her wages are under $5,700. She could file a return to get a refund of any
federal income tax withheld. She may file a state return to claim a refund too.
Lauren works two jobs and together earns $6,000. She must file a Form 1040 or
1040EZ with both her W-2s. She will owe federal income tax and possibly state income
tax.
Teens and Taxes by Carol Topp, CPA
Unearned Income
Tom has a large savings account. He earned $600 in interest. This is his only income.
Tom does not have to file a tax return, nor owe any income tax because his investment
income is under the $950 threshold for unearned income for 2009 and 2010.
Tom’s dad manages his college fund. He sold stock for a capital gain of $5,000. Tom
must file a Form 1040 and include Schedule D (Capital Gain or Loss) and Form 8615
“Kiddie Tax.” He will pay federal income tax at his parent’s rate.
Self-employed Income
Kurt mows grass for a cemetery and gets paid $1,000. It is reported to him on a Form
1099MISC. This is his only income. He is considered an independent contractor and will
owe self-employment (SE) tax. He will not owe federal income tax because his income
is under the $5,700 earned income threshold (for 2009 and 2010), but he will owe selfemployment tax. Kurt should file a Form 1040 with Schedule C Business Income or
Loss to report his $1,000 income and a Schedule SE to pay his self-employment tax.
Phil does web design and earns a profit of $6,000. Phil owes both federal income tax
and self-employment tax and, likely, will also owe state income tax. He will file a Form
1040 with Schedule C Business Income or Loss to report his $6,000 income and a
Schedule SE to pay his self-employment tax.
Household Employee
Emily earns $800 babysitting and $200 giving piano lessons. This is her only income.
Social Security and Medicare taxes do not apply to the $800 from babysitting because
she is a household employee. Her $200 from teaching piano lessons is self-employment
income, but is under the $400 threshold to pay self-employment tax.
Kurt earns $2,000 mowing lawns for neighbors. Kurt will not owe Social Security and
Medicare taxes because he is under 18 and a household employee. He will not owe
federal income tax because $2,000 is under the threshold of $5,700 for federal income
tax (for 2009 and 2010).
Both Earned and Unearned Income
Amy works at McDonalds and earns $1,000 in 2009. She also earned $500 in unearned
income (interest and dividends). She must file a tax return because her gross income of
$1,500 is greater than her earned income plus $300 ($1,300).
If Amy had unearned income of only $100, she would not owe income tax because her
gross income of $1,100 would not be greater than her earned income plus $300
Teens and Taxes by Carol Topp, CPA
($1,300).
IRS Publication 929 Tax Rules for Children and Dependents at
http://www.irs.gov/pub/irs-pdf/p929.pdf has a helpful chart to calculate your teenager's
tax if they have earned and unearned income. Be careful to note the date of this
publication. As of December 2009, the IRS had not updated this publication for 2009;
the 2008 version is listed.
This is a chapter excerpt from
Teens and Taxes: A Guide for Parents and Teenagers 2009 Edition
by Carol Topp, CPA
All rights reserved.
If you found this sample chapter helpful, you may purchase the ebook at
TeensAndTaxes.com
Teens and Taxes by Carol Topp, CPA