For students, summertime is that wonderful time of year when they get to put down the books, stay up late, sleep in and spend time with their friends. And for many older kids, it also means it’s time to find a job! Encouraging your kids to work during their summer break can be a great way to teach them about their personal finances and give them a sense of financial responsibility. It will also give you peace of mind to know where they are and what they are doing while you are at work. So whether they get a part-time job at the local sub shop or an internship in their field of study, there are a number of things to keep in mind as they get started in the working world:
- If they did not owe any tax last year and don’t expect to owe any this year, they don’t need to have federal income tax withheld. To claim this exemption, they need to write “EXEMPT” (NOT a zero) on line 7 of the W-4 form they will need to fill out with their employer. They should leave boxes 5 & 6 blank. No tax will be due for 2013 if their total income doesn’t exceed $6,100 and their unearned income (interest, dividends, and capital gains) is $350 or less. If unearned income is more than $350, their total income can’t exceed $1,000.
- If a W-4 was filed for 2012 with an exemption from withholding, even if they work for the same employer, they will need to refile the form for 2013.
- State rules vary for withholding so they should check the rules for the state in which they will be working. For Maryland, if their total income will be below $9,750 for 2013, they do not need to withhold Maryland taxes either.
- Students will often work in a state other than their home state – either getting a job in their college town or moving to the beach for the summer. Filing an exemption from withholding if their income is low enough will not only allow them to keep a few more dollars in their wallet, it will also save money on additional tax filings to claim any potential refund in a nonresident state!
- If you are looking for an incentive to encourage your children to work and save, you could offer a “matching contribution” to a Roth IRA. You can contribute 100% of your dependent child’s earnings to a Roth IRA, up to a maximum of $5,500. This is a great way to teach your kids to start saving for retirement early and also give them an incentive to work hard and save!
- If you are self-employed and your kids are under 18, hiring them to work for you can lower your tax bill. No FICA (Social Security and Medicare) tax is due on their income and you can take a deduction for the payments on your Schedule C. Federal unemployment tax is also not owed on their salaries until they hit age 21. Of course if you do this you need to make sure the child has a legitimate job and is providing services as an employee.
While your kids might be reluctant to give up their summer freedom, getting a summer job will help set them on the path to financial independence. It will be easier for them to enter the working world after college if they’ve already had some experience. I always kept busy during my summers and it certainly helped me prepare for life after college. Whether it was mowing lawns, laying tile or auditing benefit plans, all my summer jobs were valuable learning experiences that helped shape who I am today.