There are plenty of ways to earn some extra income during the summertime! But you don’t want that hard work to run up against a tricky tax situation down the road. Whether it’s your child’s first summer job or seasonal income for yourself, a few tax management insights can help you square away your records before it’s time to file.
3 Common Scenarios for the Summer Job Tax Responsibility
You’ll typically see that summer job tax scenarios will fall into one of three categories. Having a better idea of your own setup can help you avoid the tax surprises—and keep more money in your pocket!
1. Student Tax-Free Earnings
For single taxpayers in 2022, the earnings cap for this benefit is $12,950. Students who earn less than that standard deduction amount won’t have any of those earnings be subject to federal taxes, so it’s wise to earn up to that amount, at minimum, during the summer season, or even throughout the year.
Just note: This benefit is only valid for qualified students, and if you’re being claimed as a dependent on someone else’s tax return, then the tax-free unearned income you may be receiving from interest or dividends will have lower limits.
That aside, though, this benefit is a great way to maximize your earnings. Students should claim EXEMPT on their Form W-4 in the 2022 tax year whenever they anticipate earning less than that $12,950 amount. That way, your paychecks won’t have any funds withheld for federal income taxes.
2. Independent Contractor
If you’re looking at a self-employed contractor scenario, you will need to make estimated payments to cover the taxes on all earnings. These quarterly estimated tax payments are made through the IRS Form 1040-ES.
What’s more, independent contractors will be responsible for a 15.3% self-employment tax on their earnings, in addition to their state and federal taxes. By tracking your expenses and saving the right documents and receipts, however, you should be able to subtract a good amount of qualified expenses from that tax obligation. This includes things like supplies and mileage that you pay for with your gross earnings. Monitoring these business expenses will help ensure that you’ve been calculating your estimated income tax obligation appropriately and not overpaying.
3. Employee with a Form W-4
Finally, we have regular W-4 employees. This can sometimes get tricky for seasonal jobs. The tax tables used on your Form W-4 aren’t designed for seasonal work, which means you could be looking at paycheck withholdings that are too low as a supplemental income worker. You may end up owing during tax season.
On the other hand, students working during the summer might find that their tax withholdings are higher than they need to be! A quick review of your withholdings will help verify whether you can expect your earnings to exceed that year’s tax-free deduction. It’s wise to do some quick tax planning before all of your payments are issued. Then you’ll be able to have your employer adjust your federal and/or state withholdings to better match your projected earnings scenario.
Avoid the Headaches—Let’s Make a Plan
Summer jobs don’t need to come with the stress of unexpected tax obligations. You’ll want to know the ballpark number for how much of your earnings you’ll be keeping, and how much will need to be applied to taxes. Whether for your child or yourself, tax planning goes a long way!
NSO & Company serves clients all throughout the greater Indianapolis area. We’re based in Fishers and always happy to schedule consultations with both new and existing clients. Whenever you have tax code questions or need professional tax planning, know that we’re here to help!
