YOU MAY RECEIVE AN IRS FORM 1099-K THIS YEAR

 Article Highlights:

• 1099-K Reporting Threshold 
• IRS Is After Unreported Income 
• Venmo, e-Bay, Etsy, and Others 
• Deductible Expenses 
• Self-employment tax 
• Self-employment Retirement 
• Self-Employed Health Insurance Deduction 
• Hobby vs. Business

Effective for 2022 and later years, Congress reduced the threshold for the Form 1099-K filing requirement from $20,000 to a mere $600. So, you might ask, what does that have to do with me? This change can impact taxpayers in several ways, some unexpected, so you may find yourself in for a surprise that can be unpleasant in some situations.

This article explores the several ways taxpayers can be affected. But first, we need to review the purpose of the 1099-K and what can occur for you to receive one.

The 1099-K was created by the IRS as a means to detect unreported income by businesses. The IRS does that by requiring third-party settlement organizations such as credit card companies, eBay, Venmo, and others to report the transactions they’ve handled for an individual or business on a 1099-K if the gross amount of those transactions exceeds a specified threshold.

Example: Susan, who owns and operates a gift shop, accepts credit cards for purchases made by her customers. Since the credit card transactions are processed through a third-party settlement organization, that third party must issue a 1099-K for the total dollar amount of credit card transactions that Susan had for the year. The 1099-K goes to the IRS and a copy goes to Susan. The IRS can then compare the 1099-K amount to the amount Susan reports as the gross income from her business. The IRS is also aware of, through studies they have conducted, the number of cash sales certain types of businesses might have. With this information, the IRS can efficiently identify taxpayers who are not reporting all their income and ID them for audit.

Although primarily intended for businesses, there are situations where you may find yourself a recipient of a a1099-K.

One such situation is where a taxpayer is downsizing and selling personal property on eBay. If the total amount sold is $600 or more the taxpayer will receive a 1099-K. Although these sales are generally not taxable since used personal items are usually sold for less than their cost, the IRS does not know the circumstances of the sale and if the amount is significant, it needs to be reconciled on the individual’s tax return. A sale of personal property that results in a loss, is not deductible for tax purposes. In prior years, because the threshold for requiring a 1099-K was $20,000, a 1099-K was never issued to most non-business taxpayers, so there was no concern about reconciliation.

Many taxpayers are also involved in the gig economy selling their products through Etsy, eBay, etc., or hiring out their services on TaskRabbit.

Others may be driving for Uber or Lyft or making deliveries through Door Dash, Uber Eats, etc.

Some individuals have been meeting their tax responsibilities from these activities while others have not, thus prompting Congress to reduce the threshold. In either case, it is important that these individuals keep records of their expenses associated with their income-producing activities to reduce any tax liability. Here are some examples:

• Cost of goods sold 
• Advertising 
• Vehicle travel 
• Business cell phone service 
• Internet service for online sales 
• Office supplies 
• Postage & shipping 
• Some may qualify for a home office deduction 

Since these activities are generally treated as self-employment income, here are other issues to be aware of:

Self-employment tax – This is like Social Security and Medicare taxes paid by employees and matched by the employer through payroll taxes. Except a self-employed individual pays both the employee’s and the employer’s share, which combined can total 15.3% of net profit.

Self-employment Retirement – Self-employment Income qualifies for IRA contributions and the very popular Simplified Employee Pension Plan (SEP) where a self-employed individual can contribute a tax-deductible amount of 20% of their net earnings to the retirement plan.

Self-Employed Health Insurance Deduction – Most self-employed individuals can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of the taxpayer, spouse, dependents, and children under age 27 even if the child is not a dependent. However, this deduction is limited to the net income from the business.

Hobby vs. Business – Whether the activity is truly a business or just a hobby impacts how the income is reported on the tax return, deductibility of expenses (including medical insurance premiums), whether self-employment tax applies, and if contributions to retirement plans can be based on the activity’s income.

As you can see, all of this can become quite complicated and the penalties for not reporting self-employment income can be severe. Please contact this office about what expenses are deductible for your specific type of endeavor and your business filing obligations.

What people new to the workforce need to know about income tax withholding

 

For many new grads and other people entering the workforce for the first time, filling out new hire paperwork can be confusing—what’s a W-4, anyway? New employees should ensure they understand their tax situation and do some planning now, so they’re in good shape at tax time next year. It’s important to know the correct amount of tax to withhold.

Get tax withholding right.
Federal income tax is a pay-as-you-go tax. This means, taxpayers pay the tax as they earn or receive income during the year. Employers take out – or withhold – income tax from employee paychecks and pay it to the IRS in the taxpayer’s name. 

If an employee doesn’t have enough tax withheld, they may face an unexpected tax bill and a possible penalty when they file a tax return next year. If they overpay or have too much tax withheld during the year, the employee will likely get a tax refund next year. Adjusting the tax withheld up front may mean a bigger paycheck throughout the year.

Form W-4, Employee's Withholding Certificate.
New employees must complete Form W-4 so that their employer can withhold the correct amount of federal income tax from their pay. Read the instructions carefully. The employer will base the amount of withholding on the information the employee provides on their W-4 and how much the employee earns.

 In addition to when they start a new job, people can also submit a new W-4 when their personal or financial situation changes, and they want to update their withholding.

Taxpayers can use the Tax Withholding Estimator.
If a taxpayer isn’t sure how much tax they should have withheld, they can use the Tax Withholding Estimator tool on IRS.gov to:

• Estimate their federal income tax withholding.
• See how their refund, take-home pay, or tax due is affected by their withholding amount.
• Choose an estimated withholding amount that works for them.

To use the tool, taxpayers need their most recent pay statements or estimated salary, other income totals and their most recent income tax return. The tool doesn’t ask for sensitive information such as name, Social Security number, address, or bank account number.

Not all workers are employees.
Workers are classified as either contractors or employees, according to certain rules regarding the financial and behavior control the business has over the worker and the type of relationship they have. Workers who are independent contractors need to pay their taxes directly since they won’t have an employer withholding money from their paychecks. Depending on how much they earn, they may need to pay estimated tax on a quarterly basis.

Keeping tax forms in a safe place.
Employers typically send Forms W-2 end-of-year tax documents in January. This is a taxpayer’s record of the income they received throughout the year and the amount of money withheld for federal, state, local and other taxes. Taxpayers should be sure to hold on to all the tax documents received in the year and store them in a safe place to help ensure they can file an accurate 2022 tax return.

More information:
Form W-4, Employee's Withholding Certificate.
Tax Withholding Estimator
Independent Contractor, Self-Employed, or Employee?

TO ALL THE RECENT GRADS – SOME REAL-WORLD FINANCIAL ADVICE

 

You’ve just gotten your college diploma. Congratulations!

Graduating is an enormous accomplishment well worth celebrating, and with the added complication of the global pandemic, your experience was more challenging than most. But now that the last parties are over and you’ve packed up your dorm room or apartment, it’s time to get ready for the next phase of your life: a full-time, professional job. The job market is hot, so finding a position with real potential is highly probable, but it’s important that you know what to do once you start in your new position. We’ve assembled some invaluable advice – both financial and professional — to help you in your journey.

Financial Advice First

You’ve been managing money for yourself for the last few years, but there’s a big difference between working with the money you’ve earned from part-time jobs or internships (or you’ve been gifted from a budget provided by your parents) and knowing how to manage a weekly salary – especially if you’re making a significant amount. You may be tempted to skip returning to your parents’ home, to rent an apartment and buy a car and some work clothes and begin making your way entirely on your own, but that’s not always the smartest thing for you to do financially. Consider the following tips for money management:

• As much as you may want to live independently, if you can live with your family long enough to give yourself a bit of savings, you’ll be better off in the long run. It will help you to afford the first and last month’s rents that landlords require, help pay for furniture and other essentials, and let you start paying down any loans that you may have. 
  
  
• Your company will likely offer you a selection of benefits, and the way that you approach these can make a significant difference. If you are offered a 401(k), take advantage of it, and as much as you’d like to hold onto some of your cash, you should always contribute at least as much as your employer is willing to match. Failing to do so is literally giving away free money for your retirement. You should also think carefully about the health insurance that you’re offered. Keep in mind that you are eligible to remain on your parents’ policy until you are 26, so compare the costs and benefits before signing up. 
  
  
• Consider opening a retirement fund that is separate and apart from the 401(k). Retirement may seem like a lifetime away, but getting yourself into the habit of depositing into a Roth IRA is a smart thing to do. The money goes in after-tax and can be taken out when you retire tax-free. You can put away as much as $6,000 per year. 
  
  
• If you’ve been using your parents' credit cards to pay for things and don’t have any loans, then you also don’t have a credit history – and you need one. Take out a credit card in your own name and make sure that you pay them off every month. Take care to pay every bill in full on time. 
  
  
• Learn to keep a budget. Now that you have a predictable salary and take-home pay, it’s time to sit down, write down your total monthly net income and total monthly expenditures on necessities like groceries, rent, utilities, etc., and figure out how much you should be spending, how much you should be saving, how much should go to paying off debts – and stick to it! 

Now the Professional Advice

Starting a new job always feels like opening a door to endless possibilities – but that’s especially true of your first job out of college. Though you’re sure to make plenty of mistakes, there are also things that you can set yourself up to do right, right off the bat. Here are some suggestions collected from multiple executives and culled from years of experience:

• Don’t be too risk-averse – this is the time to take some chances. As long as your ideas have been thought out, it’s okay to make mistakes – and sometimes your fresh perspective can make a real difference and set you above the crowd. 
  
  
• Let your personal attributes shine. Many people enter the professional world with an idea of how they are supposed to act or who they are supposed to emulate. You were hired for your own characteristics, so be sure to be yourself. 
  
  
• Meet as many people as possible. Networking is an invaluable tool. Each new person that you meet should be considered a link to your future. 
  
  
• Remember that taking your time can be a virtue. Don’t be in such a rush to get where you’re going that you skip steps that can be valuable to your growth. 
  
  
• Take every opportunity to travel. Whether it is throughout the United States or internationally, you will learn a great deal from traveling as part of your job. Not only will you get greater exposure to the way that others do their work or live their lives, but you will be viewed as more open to interesting or diverse assignments. 
  
  
• Don’t turn down responsibilities that are outside of your expertise. The more flexible and adaptive you are, the more you will learn, and the more opportunities that you will be given. 
  
  
• Remember that every job teaches you something. Even a job that you despise has skills that you can carry or use to create a better opportunity. It may not be your dream job, but it may be a necessary step to reaching your dream job. 
  
  
• Be sure to listen carefully to those around you, whether they are your colleagues, your clients, or your supervisors. Being a good listener is highly valued. 

As you grow in your career, you may have financial questions or need guidance from someone with more experience. Please contact our firm if you need help navigating personal finance or tax-related matters.

Don’t throw these out

 

Yes, the financial markets look pretty rough as I write this, on top of a pretty rough end of last week. Inflation continues to wreak havoc … and the smartypants quants in Wall Street don’t seem to have confidence that the government or the Fed are making the right moves.

Many of my clients could give a rip about the financial markets, but it affects many retirees, and also small businesses who are connected to or serve public companies. Buckle up friends … we’re not yet out of the woods.

In an encouraging recognition of reality, last week the IRS announced a 4-cent/mile increase in the standard mileage rate for the rest of 2022 bringing it to 62.5 cents per mile. At least that’s one bright spot in the rising gas prices reality we’re living in (albeit, a very tiny spot).

And to continue the IRS’s giving spirit to help out U.S. taxpayers like you, the IRS recently wrapped up its 2022 Dirty Dozen tax scams list… to help you stay in the know and avoid falling afoul of those predators – because it can get really messy to undo the damage of a tax scam. 

If you or someone you know is caught in a mess like that and needs some expert help to find a way out, well, that’s one of the many things we’re here for:
www.afitonline.com/appointments

But one great way to protect yourself (from scam artists… or from when the IRS takes a “special look” into your tax records) is keeping your tax records and documents on hand – and for the right amount of time. That way you have a defense when things aren’t going your way.

That doesn’t mean you have to hold on to everything and hold on to it forever. So, let’s jump into what to keep and how long. This might seem very boring to you – until it isn’t.

Mike Mead's 
"Real World" Personal Strategy Note
Which Tax Documents to Keep and Why
“If you wish to inflict a heartless and malignant punishment upon a young person, pledge him to keep a journal a year.” – Mark Twain

Remember when everybody thought paper (as in “paperwork”) was going to vanish soon? While e-filing and electronic documentation is becoming much more normalized, if your filing cabinets look anything like ours at the end of tax-filing season, paper sure is still hanging around. 

But regarding your taxes, how many of those paper records do you actually need to keep? And how long do you need to keep them? And what’s the best way to store them – in case you someday have to prove something you claimed on your tax return? 

The basics

Saving too many paper records is just as bad as not saving any – you’d never be able to find what you need (unless you’re just ridiculously good at keeping them organized – in something other than a box at the back of your closet). You’re looking to hit a balance of complete and adequate records stored neatly. 

Most obviously, keep the state and federal tax returns that you filed (the latter is the IRS Form 1040 or one of its variations). You also want to save anything that backs up what’s on your return, such as the Forms 1099, W-2s, and other income statements. 

You should also keep any 1099-Bs or 1099-INTs that you got from banks, brokerages, and investment firms. If you bought or sold mutual fund shares, stocks, or other securities, keep the confirmation slips or statements. (Should you need these in the future, some may be available online from the institutions’ websites – more on electronic storage in a bit …). 

Other circumstances might require you to keep other records: 

• If you lost your job last year and got Unemployment, keep the 1099-G that reports what you received. 
• Keep records of your federal stimulus payments and IRS Letter 6419 if you got the federal Child Tax Credit. 
• If you itemize your tax deductions, keep credit card receipts (at least until you reconcile them with your monthly statements), invoices, mileage logs, and canceled checks. 
• If you sold a home, you'll need records that prove what you paid and what you received from the sale. If you sold a rental property, keep the records of the amount you invested in the property and what you deducted for depreciation. And keep your Schedule E, which reports your annual rental income, as long as you own the property.  

A question of time

How long do you have to keep these things? Conventional wisdom has always said seven years. You may not need to keep your tax records half that time. Or you may need to keep them a lot longer. 

The IRS is backlogged like you wouldn’t believe right now – 24 million returns still to go for 2021 – but if there’s no fraud involved in your returns, the statute of limitations (or “lookback”) by the IRS is generally three years. 

Many factors can lengthen that time. If you substantially underestimated your income (usually by 25% or more), Uncle Sam might want to scope your tax records back six years. The same timeframe holds true if you substantially overstated the cost of property to minimize your taxable gain or happened to forget five grand or more in an offshore account. Keep records for seven years if you file a claim for a loss from worthless securities or a bad-debt deduction. 

And be warned: If you failed to file a return or if you filed a fraudulent return, there’s no limit on the time the IRS enjoys to come after you. 

Some tax records are important not for what happened to you financially in the past year but for what might happen to you in the future. If someday you sell a property at a profit, for example, you’ll owe capital gains tax on that profit. Same for other investments, like stocks. You’ll need records to calculate your capital gains. 

Some also advise hanging on to just the 1040 forever – it can come in handy for any number of financial matters much further out than seven years.  

Picture this

You might be tempted to organize this stuff by type – all credit card receipts here, for instance, all 1040s there – but no. Sort and store by year, not category; keep all documents together with that year’s tax return. 

If you have physical files, think about a fireproof safe in your home or a safe deposit box in a bank. (The latter doesn’t offer nearly the legal protection you think it does, by the way, but it’s still better than the bottom of your closet.) Bear in mind too that if you itemize deductions, today’s oh-so-modern register receipts fade unbelievably fast. Take a picture – it’ll last longer. 

While we’re on that topic, why not run those records through your printer/scanner at home and ship them up to the cloud for electronic storage? We can help you find an e-storage provider who offers top-notch security. 

And when finally saying good-bye to any paper files, shred shred shred. 

          

Like I mentioned last week, I’m here for you during these crazy times, and my team and I will do whatever we can to help you find your way through them. Just reach out:
www.afitonline.com/appointments

Or if you know someone needing some support and guidance on tax matters, share this with them, too. I’m here to serve and love the opportunity to guide people through the storm. 

In your corner,

Mike Mead, EA, CTC
Alliance Financial & Income Tax
807 NW Vesper Street
Blue Springs, MO. 64015
P - 816-220-2001 x201
F - 816-220-2012
www.AFITonline.com
https://www.facebook.com/AFITonline
http://www.linkedin.com/in/mikemeadinbluesprings

What taxpayers need to know about making 2022 estimated tax payments

By law, everyone must pay tax as they earn income. Generally taxpayers must pay at least 90 percent of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty when they file. Some taxpayers earn income not subject to withholding. For small business owners and self-employed people, that usually means making quarterly estimated tax payments.

Here are some key things to help taxpayers determine if they need to make estimated tax payments:

• Generally, taxpayers need to make estimated tax payments if they expect to owe $1,000 or more when they file their 2022 tax return, after adjusting for any withholding.
• The IRS urges anyone in this situation to check their withholding using the Tax Withholding Estimator on IRS.gov. If the estimator suggests a change, the taxpayer can submit a new Form W-4  to their employer.
• Aside from business owners and self-employed individuals, people who need to make estimated payments also include sole proprietors, partners and S corporation shareholders. It also often includes people involved in the sharing economy.
• Corporations generally must make these payments if they expect to owe $500 or more on their 2022 tax return.
• Aside from income tax, taxpayers can pay other taxes through estimated tax payments. This includes self-employment tax and the alternative minimum tax.
• The remaining deadlines for paying 2022 quarterly estimated tax are: June 15, Sept. 15, and Jan. 17, 2023.
• Taxpayers can check out these forms for details on how to figure their payments:
• Form 1040-ES, Estimated Tax for Individuals 
• Form 1120-W, Estimated Tax for Corporations
• Taxpayers can visit IRS.gov to find options for paying estimated taxes. These include:
• Direct Pay from a bank account.
• Paying by credit or debit card or the Electronic Federal Tax Payment System.
• Mailing a check or money order to the IRS.
• Paying cash at a retail partner.
• Anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late. The penalty may apply even if the taxpayer is due a refund.

TAX TIPS FOR RECENTLY MARRIED TAXPAYERS

 

This is the time of year for many couples to tie the knot. When you marry, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered your name and SSN don’t match at the time your return is filed. 
   
   
2. Notify Those Paying You as a Contractor – If you are a self-employed sole proprietor filing your business income and expenses on a Schedule C, and you have a different name now that you are married, notify anyone who has been issuing you a Form 1099-NEC under your Social Security number about the name change. This will prevent a mismatch with the IRS. 
   
   
3. Notify the IRS - If you have a new address, you should notify the IRS by sending in a completed Form 8822, Change of Address. If your state has an income tax, also notify the appropriate tax agency. 
   
   
4. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded. 
   
   
5. Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your joint return for the first time. On the other hand, if only one of you works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. In either case, it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for the year to make sure that you are not going to be under-withheld and that you don’t set yourself up to receive bad news for the next filing season. Even if no adjustment is needed with your tax withholding, you will still need to advise your employer of your new marital status and name change, if applicable. 
   
   
6. Notify the Marketplace – If you or your spouse have health insurance through a government Marketplace (Exchange), you must notify the Marketplace of your change in marital status. If you were included on a parent’s health insurance policy through a Marketplace, then the parent must notify the Marketplace. Failure to notify the Marketplace can create tax filing problems. 

If you have any questions about the impact of your new marital status on your taxes, please give this office a call.

Settling Tax Debt With an IRS Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. That's the good news. The bad news is that not everyone can use this option to settle tax debt; the IRS rejected nearly 60 percent of taxpayer-requested offers in compromise. If you owe money to the IRS and wonder if an IRS offer in compromise is the answer, here's what you need to know.

Who is Eligible?

If you can't pay your full tax liability or doing so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means generally won't qualify for an OIC.

To qualify for an OIC, the taxpayer must have:

• Filed all tax returns.
• Made all required estimated tax payments for the current year.
• Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

IRS Acceptance Criteria

Whether your offer in compromise is accepted depends on several factors; however, an offer in compromise is typically accepted when the amount offered represents the most the IRS can expect to collect within a reasonable time frame - referred to as the reasonable collection potential (RCP). In most cases, the IRS won't accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer's ability to pay.

The RCP is the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to the property, the RCP includes anticipated future income minus certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on one of the following criteria:

Doubt as to liability. An OIC meets this criterion only when there's a genuine dispute about the existence or amount of the correct tax debt under the law.

Doubt as to collectability. This refers to whether there is doubt that the amount owed is fully collectible such as when the taxpayer's assets and income are less than the full amount of the tax liability.

Effective tax administration. This applies to cases where there is no doubt that the tax is legally owed and that the full amount owed can be collected - but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Application and Fees

When requesting an OIC from the IRS, use Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are applying as a business, use Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must also file additional forms.

A nonrefundable application fee, as well as initial payment (also nonrefundable), is due when submitting an OIC. However, if the OIC is based on doubt as to liability, no application fee is required.

If the taxpayer is an individual (not a corporation, partnership, or other entity) who meets Low-Income Certification guidelines, they do not have to submit an application fee or initial payment. They will not need to make monthly installments while the IRS evaluates an offer in compromise.

The initial payment is based on which payment option you choose for your offer in compromise:

Lump Sum Cash. Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.

Periodic Payment. Submit your initial payment with your application. Continue to pay the remaining balance as monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

The IRS will notify you by mail if it rejects your OIC. The letter will explain why the IRS rejected the offer and provide detailed instructions on appealing the decision. If you decide to appeal, you must do so within 30 days from the date of the letter.

Help is Just a Phone Call Away

If you have any questions about the IRS Offer in Compromise program, don't hesitate to contact the office for more information.

TIPS FOR STUDENTS PLANNING TO WORK DURING THE SUMMER

 

As the summer break from school approaches, many students are looking for part-time summer employment. Both parents and students should be aware of the tax issues that need to be considered when working a summer job. Here is a rundown of some of the more common issues:

• Completing Form W-4 – The W-4 form is used by employers to determine the amount of tax that will be withheld from an employee’s paycheck. Students with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student with income only from summer and part-time employment, and who is claimed as a dependent of someone else, can earn as much as $12,950 (the standard deduction amount for 2022) without being liable for income tax. However, if the student has investment income, the tax determination becomes more complicated because, as he or she is a dependent of another, special rules apply.
   
• Watch Out for Payroll Surprises – Some employers may attempt to avoid their payroll tax liabilities by paying the student in cash and incorrectly treating them as an independent contractor, thus leaving the student with the responsibility of paying both the employee’s and employer’s payroll tax liability (see self-employment tax below). If a potential employer intends to do that, they will generally ask the student to complete a Form W-9 rather than a W-4 or simply ask for their Social Security Number (SSN) without requesting a W-4. 
  
  
• Tips – A student who works as a waiter or a camp counselor may receive tips as part of their summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. This reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and Medicare taxes) and income taxes on these reported tips, then includes the tips and wages on the employee’s W-2. 
  
  
• Odd Jobs – Many students do odd jobs over the summer and are paid in cash. Just because the payment is in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see next). These earnings include income from odd jobs like dog walking, babysitting, and lawn mowing. 
  
  
• Self-Employment Tax – When a student works as an employee, the employer withholds Social Security tax and Medicare tax from the employee’s pay, matches the amount dollar for dollar, and remits the combined amount to the government. On the other hand, a student who is self-employed is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings are $400 or more. This tax pays for future benefits under the Social Security system and Medicare Part A. Even if the student is not liable for income tax, this 15.3% tax may apply to a student’s odd jobs. 
  
  
• Working for Parents – A child under the age of 18 working in a business solely owned by his or her parents is not subject to payroll taxes. This saves the child from having to pay the 7.65% payroll taxes and also provides the parent with relief from payroll taxes. The payroll tax exception won’t apply if the parent’s business is set up as a corporation. 
  
  
• ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable. 
  
  
• Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:
  
  o They are in the business of delivering newspapers;
  o All of their pay for these services directly relates to sales rather than to the number of hours worked; and
  o They perform the delivery services under a written contract that states that they will not be treated as an employee for federal tax purposes.
   
• Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax. 
  
  
• Retirement Plan Contributions – Putting away money for retirement is probably the last thing a student will want to spend their summer earnings on. However, having earned income opens up the opportunity to make traditional and Roth IRA contributions. 

If you are a student or the parent of a student with questions about these or other issues associated with student employment, please contact this office for assistance.