We have more clients than ever whose kids have their own income and come to us with questions. Whether it’s from a neighborhood lawnmowing business, Uber driving, or Twitch, if they had net earnings over $400 for the year from self-employment, they need their own tax return.
Things to keep in mind:
- Everyone, including minors, must file a tax return if they had net earnings from self-employment of at least $400.
- If they owe taxes, teens and young adults must file their own tax return, even if their parent or guardian claims them as a dependent.
- Teens and young adults can prepare and sign their own tax return. There is no minimum age to sign a tax return.
- Parents can’t claim a dependent’s earned income on their own tax return.
- In addition to income tax, people who are self-employed are generally responsible for self-employment tax (15.3% of net earnings) as well. It’s in place of the Social Security and Medicare taxes withheld from the pay of most wage earners.
- Teens and young adults can lower the amount of tax they owe by deducting certain expenses.
Here’s what young entrepreneurs can do to keep on top of their tax responsibilities:
Keep good records. Stress to your teen just how important this step is and give them the tools to make and keep financial records and receipts throughout the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.
Pay estimated tax, if required. If a teen or young adult being claimed as a dependent expects to owe at least $1,000 in tax for 2022, they must make estimated payments on a quarterly basis. They should be sure to pay enough tax on time to avoid a penalty. If they don’t need to make estimated payments, ensure they understand they need to set aside enough to at least pay their self-employment taxes come tax season. Form 1040-ES, Estimated Taxes for Individuals
If a taxpayer also has a job where tax is withheld by their employer, they can request that their withholding be increased to cover their estimated taxes from their self-employed income. That way, they don’t have pay estimated tax separately. The Tax Withholding Estimator is a great tool to help wage earners figure out how much they should be withholding.
File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records and e-file their tax return. When preparing to file a tax return, they should make sure to review all their records, including estimated tax they’ve already paid. If taxes are owed, they can pay electronically through an IRS Online Account and IRS Direct Pay. Visit the Payments page of IRS.gov for the full list of payment options.