United States: School Is Out And Summer Employment Is In: Tax Tips For Students

Employment during the summer is a great opportunity for students to build a résumé, gain experience, create valuable connections and develop some financial independence. Summer jobs can also provide students with spending money, assist with college tuition payments (or more realistically, one semester of books) and potentially offer practical experience for a future career. Summer employment offers experiences often not available or cannot be replicated in a classroom.

Along with such benefits, summer employment will introduce students to a five-letter word that up until this point in life probably had very little meaning, but will affect them regardless of the amount of income earned—taxes! They will learn the reality that earning $15 an hour does not equate to $15 an hour in their pocket. 

Here are a few notable tax tips for students with or contemplating summer jobs: 

Employee Paperwork

When you get a new job, you will need to complete IRS Form W-4, Employee's Withholding Allowance Certificate. Employers use this form to determine how much federal income tax to withhold from your pay. The lower the number of "exemptions" claimed, the higher your income tax withholding. Conversely, the higher the number of "exemptions" claimed, the lower your income tax withholding.  Irrespective of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at a 6.2 percent and 1.45 percent rate, respectively, and is not available for refund unless you earn more than $118,500. A student should be so lucky.

If you are treated as an employee, your employer withholds tax from your paychecks. If you are treated as self-employed (think babysitting, lawn care, painting—see Self Employed Individuals), you may have to pay estimated tax directly to the IRS on set dates during the year. If you earn $400 or more, you will need to file a federal tax return.

Self Employed Individuals

Like many students, you may have multiple informal jobs, such as babysitting, lawn care, hardscaping, painting, swimming lessons and the like. Earning $400 or more may subject you to self-employment tax reporting. While self-employment income can be offset by qualified expenses incurred for the production of the self-employment income, it is crucial to keep detailed records of receipts and expenses incurred and paid. Also, be aware of the hobby loss rules, which limits the deduction of losses from income when there is no profit motive. The hobby loss rules are complex and beyond the scope of this Alert. However, if you or a family member is self-employed, be sure to seek professional advice for proper tax reporting guidance. Under either an employee or self-employed situation, it is prudent to set aside money to pay the tax that may be due when the returns are filed.

Employed by Parent

Working with mom or dad has many non-tax and tax benefits. From a tax perspective, bona fide wages paid by a parent to a child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Additionally, parents may claim the child's wages as a deductible business expense provided the child is treated as a regular employee, wages are paid in dollars (as opposed to food, shelter, etc.) and a W-2, Wage and Tax Statement is filed.

Keep Track of Your Expenses

You may be eligible for several tax deductions such as union and professional dues, qualified education expenses and job-related expenses if you itemize expenses on your tax return. Moving expenses and student loan interest may also be deductible, whether or not you itemize expenses. Keep close track of your expenses and you may be able to reduce your tax liability. Then consider investing the refund in a Roth IRA (see Retirement Planning).

Tip Income

The service industry is where many students land summer employment and where compensation is primarily tip driven. All tip income is taxable. Any cash tips of $20 or more per month are required to be reported to the employer. Also, you must report all of your yearly tips on your tax return.

The key to accurately reporting tip income is organization and detailed recordkeeping. In the event of an IRS audit targeting unreported tip income, interest and penalty assessments can be significant. There are a variety of recordkeeping techniques and resources available to assist with accurate reporting of tip income, including tip tracking apps. Popular apps, such as Just the Tips, TipSee and Tip Log, may help keep track of daily, weekly and monthly tips as they are earned and recorded.

Out-of-State Employment Adds Complexity

Another consideration to keep in mind while engaged in seasonal employment is the job location. Physically working in one state but residing in another state can add certain complexities to tax reporting, including the filing of additional state income tax returns. In most  states, taxes will be withheld and paid to the state of employment. 

However, reciprocal agreements, which many states have in place with neighboring states, eliminate the complexity and the need for non-resident state tax withholding from the wages of non-resident seasonal employees. For example, if you reside in Pennsylvania but work in Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia, the out-of-state employer will withhold Pennsylvania income taxes with no taxes withheld or paid to that employer’s state. The table below summarizes states with reciprocal agreements presently in place.

States with Reciprocal Agreements

Resident State State You Are Employed In
Any State District of Columbia
Illinois Iowa, Kentucky, Michigan or Wisconsin
Indiana Kentucky, Michigan, Ohio, Virginia, West Virginia or Wisconsin
Iowa Illinois
Kentucky Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia or Wisconsin
Maryland District of Columbia, Pennsylvania, Virginia or West Virginia
Michigan Illinois, Indiana, Kentucky, Minnesota, Ohio or Wisconsin
Minnesota Michigan or North Dakota
Montana North Dakota
New Jersey* Pennsylvania
North Dakota Minnesota
Ohio Indiana, Kentucky, Michigan, Pennsylvania or West Virginia
Pennsylvania Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia
Virginia District of Columbia, Kentucky, Maryland, Pennsylvania or West Virginia
West Virginia Kentucky, Maryland, Ohio, Pennsylvania or Virginia
Wisconsin Illinois, Indiana, Kentucky or Michigan

* New Jersey has proposed legislation to eliminate the reciprocal agreement in place with Pennsylvania.

If you are working in a state without a reciprocal agreement with your resident state, you will be  subject to both resident and non-resident state income taxes. For example, if you reside in Pennsylvania but work in New York, you will need to file in both states. However, in most cases a credit for taxes paid to the non-resident state will be available on your resident state tax return subject to certain limitations. Multi-state tax reporting is complex and rules vary from state to state, so be sure to seek professional advice if you find yourself in this situation.

Retirement Planning

It’s never too early for retirement planning and wealth accumulation. The power of compounding is magical. Students with summer jobs should consider contributing to a Roth IRA. Since contributions to a Roth IRA are funded with after-tax dollars, they provide for tax-free growth and more importantly tax-free distributions in retirement. The only eligibility requirement to contribute to a Roth, assuming the student’s income will not exceed income limitations, would be earned income. You can contribute up to the amount of money earned for the year, with a maximum contribution of $5,500. So, a yearly contribution of $5,500 for the first six years with no additional contributions for 40 years until retirement at 6.5 percent annually results in a whopping balance of nearly $500,000.

If you would like more information about this topic or your own unique situation, please contact Rodney N. Anello, EA, or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page located here.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.