A summer job is a great way to add some extra money to your bank account. Whether you’re a cash-strapped college student, a teacher trying to stay busy during the summer months or simply have some extra time on your hands, racking up those part time hours can really pay-off.
However, before you go out and celebrate with all the money you’ve made, it’s important to understand your obligations to Uncle Sam. If your only income for the year is from part-time, summer work, there’s a good chance you may not owe too much in taxes. But, if you earned income throughout the rest of the year, you’ll want to make sure you’re prepared come tax filing season.
To help you get prepared, there are three types of tax you’ll want to pay most attention to:
- Social Security and Medicare tax (often called FICA)
- Federal Income tax
- State Income tax
Now that you know their names, let’s break them down.
Social Security and Medicare tax
Your employer will automatically deduct Social Security and Medicare taxes from each of your paychecks. The Federal Insurance Contributions Act, or better known as FICA, is a federal law that requires employers to withhold these two taxes from your wages each pay period.
But, on a good note, your employer also kicks in half for your Social Security and Medicare tax payments.
If you are self-employed, meaning you work as an independent contractor or for your own business, you will need to set aside money to pay your taxes. That money should include Social Security and Medicare tax, which is lumped together and called “self-employment tax.” Self-employment tax for 2016 is 15.3% on the first $118,500 of net income and then 2.9% on the net income that is in excess of $118,500.
Be sure to keep track of all your expenses because you can deduct them from income before paying Self-Employment tax.
While the average taxpayer is subject to Social Security and Medicare taxes, there are a few exceptions to the rule. For example, if you’re under age 18 and perform household work, such as babysitting or yard work, you don’t have to pay Self-Employment tax. The same goes for newspaper carriers, distributors and vendors.
And, if Mom and Dad hire you to work in their business, there’s a good chance you may not have to pay Social Security and Medicare tax, either. However, to meet this exception, you must be under age 18, and your parents’ business must be a sole proprietorship or partnership, not a corporation.
Federal Income tax
Another important tax to be aware of is the Federal Income tax. This tax is levied by the IRS and based on your taxable annual income. However, in some cases, this tax does not apply to everyone.
If you’re a single student being claimed as a dependent on your parents tax return, you can generally earn up to $6,300 (in 2016) before you owe federal income tax.
If you earn more than $6,300, you’ll pay 10% of the next $9,275 you earn. After you pass the $15,475 mark ($6,300 + $9,075), the rates are higher.
State Income tax
Unless you live in one of the seven states that don’t have income tax, you’ll have to pay state income tax too.
State income tax varies in respect to tax rates, how they are applied, the types of income that is taxable and what deductions and credits are allowed. However, it is usually less than Federal Income tax.
The non-income tax states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
If you are only working during the summer, you may qualify for a tax exemption, meaning your employer will not withhold income tax from your paycheck. This only applies if you made less than $6,300. And, keep in mind, an exemption does not extend to Social Security and Medicare taxes.
In order to qualify for a tax exemption, you must meet specific criteria. To claim exempt, you must have received a refund of all income tax withheld from your paycheck in the previous tax year and expect the same to happen in the current year. If you meet both of those criteria, you can mark “EXEMPT” on line 7 of Form W-4. Typically your employer will ask you to complete Form W-4 when you start working. This form is used to notify your employer how much tax they should withhold from your pay.
If there’s any chance you may earn more than $6,300 during the year, you will then owe income tax. In that case, it’s better to have income tax withheld from each paycheck. It’s a lot easier to have money withheld now than to come up with it next year when filing your tax return.
Do I need to file an income tax return?
If you don’t make more than $6,300 as an employee, you generally don’t have to file a tax return. However, if you had income tax withheld from your paychecks, you’ll want to file return in order to get that money back.
If you run your own business and make more than $400, you’ll need to file Schedule C with your tax return and pay self-employment tax, unless you qualify for one of the exceptions.