Attention Students: Are You Working This Summer?

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Ah, summer. Bikinis on the beach. Daiquiris in hand. Students indoors… working. If you’re a student pulling a summer stint to pay some bills or work off those loans, keep the following tax tips in mind.

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The Federal W-4 tells your employer how much income tax to withhold from your pay (Regardless of the income tax, Social Security, Medicare, and Disability Insurance will be withheld.). If you have less than $300 of unearned income, like interest or dividends, and your working earnings for the year will be less than $5,800, you won’t have any Federal tax liability. You can then just complete lines 1,2,3,4, and 7, and sign the W-4 form. You won’t have to file a Federal 2011 tax return.

The threshold for filing a NY State income tax return is lower, only $3,000 of working earnings. You can file the exempt form, NY State IT-2104-E, if you had no New York income tax liability last year, and you are a full-time student under 25. Check out the requirements, and if this does not apply to you, file the IT-2104, as Single and claim zero exemptions.

Note that these are special rules for students.

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Tips are taxable. Yes, the tip, which is short for ‘to insure promptness,’ is fully taxable, whether you are a camp counselor, waiter, or dog-walker. Your tips are subject to Federal, State, and local income tax, as well as social security. If your tips total $20 or more during the month, you must report them to your employer by the tenth of the following month. (And yes, if your tips are less than the $20 threshold for month one, you must add them to the total of month two. Sorry, but I’m glad you’re thinking.) Use IRS form 4070A to keep track of this income.

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You don’t get a free ride for being paid in cash for babysitting or lawn mowing. In fact, you will probably have to pay more because you may be considered an ‘independent contractor.’ An independent contractor not only pays the same Federal, State, and local income taxes, but pays 100 percent of the Social Security and Medicare tax, referred to ‘self-employment tax’! When you are an employee, your employer withholds the income tax, as well as almost 50 percent of the total Social Security and Medicare tax, from your wages. The other almost 50 percent is contributed by your boss, and then that total amount is sent to the government on your behalf. As a self-employed person, you are wearing two hats – the employee and the employer. You send in your taxes on a prescribed basis, and you pay 100 pecent of the self-employment tax. If you don’t pay timely, you are subject to a penalty. For 2011 the total self-employment tax for an employee is 5.65 percent, and for the employer, 7.65 percent, for a total of 13.3 percent of your net earnings.

To avoid the extra costs, I have seen employers (from retail stores to attorneys) pay summer help in cash or check. Although the employer doesn’t save on income tax, the employer savings is the Social Security and Medicare tax savings of 7.65 percent of the gross wage, plus Unemployment Insurance Tax, and Workers’ Compensation and Disability insurances, and more. The employer savings starts at about 10 percent. If you are in this situation, you’ll receive a form 1099-MISC at the end of the year, and will have to pay not only your income taxes, but 100 percent of the self-employment tax (13.3 percent) as well. So, save some of the earnings.

The IRS has special rules if you are a newspaper carrier or distributor. Here, you are a direct seller and are considered by statute as a non-employee and treated as self-employed regardless of age for all federal tax purposes, including income and employment taxes. The conditions are:

1. You are in the business of delivering/distributing      newspapers or shopping news, including directly related services such as      soliciting customers and collecting receipts.
2. Substantially all your pay for these services      directly relates to sales or other output rather than to the number of      hours worked.
3. You perform the delivery services under a written      contract between you and the service recipient that states that you will      not be treated as an employee for federal tax purposes.

However, if you do not meet all of the above stated requirements, and if you are 18 years of age or older, your pay generally is subject to Social Security and Medicare tax withholding. If you are under age 18, then you are generally exempt from Social Security and Medicare tax.

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Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as that received during summer advanced camp, is taxable.

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• If you have a self-employed parent, both of you may save if they hire you. (Attention parents: this may apply to your rental property as well.)
• Think about saving some of your summer earnings. Make a contribution to a ROTH IRA. The money grows tax-free, and the principal is available when you need it, also tax-free.

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Is your child at least 7 years old? You can hire them to do small jobs they are capable of, pay no Social Security or Medicare taxes or unemployment insurance on their salary, and take a tax deduction for the amount of their salary. You save income tax and self-employment tax.

Some of you use your barber to prepare your taxes. ‘Shaving’ and ‘cutting off a bit from the top’ may be harmful to your tax health.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.