Summer brings warm weather, fun outdoor activities, and new opportunities to earn some additional income. However, taxes on seasonal income need to be handled with care, whether they’re related to your child’s first job or an extra income opportunity for you.
Here are some tips to help you manage the taxes on your summer earnings:
Students should take advantage of tax-free earnings limits. If you anticipate making less than the annual standard deduction ($12,950 for single taxpayers in 2022), none of your earnings are subject to federal taxes! If possible, earn at least that amount each year to maximize your tax-free earnings. Remember, if you can be claimed as a dependent on someone else’s tax return, the limits for tax-free unearned income such as interest and dividends are lower.
Tip: If your annual earnings will be less than the standard deduction, you can claim EXEMPT on your Form W-4. That prevents federal income taxes from being withheld from your paycheck.
Independent contractors need to make estimated payments. As an independent contractor, you are responsible for paying all the taxes on your earnings. To do this, you make quarterly estimated tax payments to the IRS using Form 1040-ES. In addition to federal and state taxes, independent contractors need to pay a self-employment tax of 15.3% of earnings.
Tip: Track your expenses and save receipts. By doing this, you can subtract eligible expenses like mileage, supplies and uniforms from your gross earnings. Use this lower-income number to calculate your self-employment tax and correctly estimate your income tax obligation.
Closely monitor tax withholdings. As an employee, your employer withholds taxes based on what you claim on Form W-4. Unfortunately, the tax tables used by this form to calculate your withholdings do not account for seasonal jobs. This typically results in paycheck withholdings being too low for supplemental income workers and too high for students working during the summer.
Tip: If you anticipate earnings in excess of the standard deduction, request a revision of your withholdings. Use tools on the IRS website, review last year’s tax return, or ask one of the tax experts at Loeffler Financial Group for help to estimate the correct amount to withhold. From there, ask your employer to adjust your federal and/or state withholdings up or down.
With a little tax planning, you can ensure that your summer job provides the income you are looking for without the disappointment of unexpected taxes. Please call if you have any questions.