Getting a real job is an exciting step for many teenagers. Not only will the steady stream of paychecks provide them with spending money, but these first jobs can also be instrumental in developing a sense of independence and responsibility.
However, some teens may be surprised to learn that they won't bring home their entire hourly wage. Reviewing a pay stub can be a bit of a shock to a teen who discovers how much money is taken out for income taxes. When tax season rolls around, it can be even more confusing for teens who have no experience filing tax returns.
Whether you're starting your first job, filing your first tax return, or just thinking about filling out some job applications, here are five things that all teens should know about taxes.
Minors Pay Taxes
Age is not a factor when determining whether a person has to pay income tax or not. All that matters—from the standpoint of the Internal Revenue Service (IRS)—is whether you earn an income. If a teenager receives money from an employed position, income tax will be deducted from their paycheck.
Teens who earn a minimum amount will also have to file annual income taxes. The minimum changes each year, so it's important to stay on top of the latest tax laws. Even though the specific figure changes, it's always tied to the standard deduction. When your income from an employed position meets or exceeds the standard deduction, you will likely have to file an income tax return. For tax year 2021, the standard deduction for individuals is $12,550.
For tax year 2021, an employee would reach the standard deduction threshold if they were to work a little more than 16 hours per week at a job that pays $15 per hour.
Unofficial Jobs Still Count as Income
If a teen isn't technically employed, but they still earn income, they're likely considered "self-employed." Any money-making side hustle that a teen engages in will probably land them in this category. This could include babysitting, making custom T-shirts to sell, or a lawn-mowing business around the neighborhood. If a teen earned at least $400 in tax year 2020 through these types of self-employed activities, they will need to file a tax return in 2021.
Like the standard deduction, the threshold for reporting self-employed income changes periodically to keep up with inflation, so it's important to keep track of those figures as well as your total income from odd jobs and side hustles.
Teenage Employees Need to Complete a W-4
If a teen isn't sure whether they fall into the employed or self-employed category, there's an easy way to tell. New hires are usually given a stack of forms to fill out, and if they're truly "employed," then that stack will include Form W-4.
Your W-4 essentially tells your employer your tax situation. Since taxes are withheld from your paycheck by your employer, your employer needs to know how much money to withhold from each paycheck. The W-4 gives employers the information they need to handle your taxes accurately.
No one—teenage or otherwise—should sign a legal document they don't understand.
If a teen isn't sure what the W-4 is or how to fill it out properly, they should ask for help. The human resources department will be able to help navigate any of the paperwork, but anyone who has ever been employed (like a parent or trusted adult) will also likely be able to help a teen figure out their W-4.
Teens May Need to File Taxes for Unearned Income
If a teen has inherited money, stocks, or real estate, it may be best to check with an accountant about their tax situation. Minors may have to report income if accounts are in their name. Minors who inherit such things from a grandparent or an aunt, for example, may suddenly have capital gains, which means that they may owe capital gains taxes.
Only teenagers with significant unearned income will have to pay taxes, so you don't need to worry about the IRS coming after you for the $20 your grandma put in your birthday card. For tax year 2021, the taxable threshold for unearned income for minors is $2,200.
Tax Revenue Funds Government Spending
Teenagers who are new to income and taxes may wonder why they have to pay taxes at all. Income taxes help fund services that all Americans use. Roads, firefighters, and public schools are all examples of institutions that receive government money—and that comes from taxes.
It's never too early for teenagers to learn about money. No matter what type of income a teen has, or whether they have to file income taxes, it's important to understand how taxes work. Having a strong understanding of taxes and the economy makes people better aware of both national economics and politics as well as their own personal finances.
Luckily, the U.S. government provides plenty of transparent resources to help citizens learn exactly how much money is being raised through taxes and how that money is being spent. These resources include USASpending.gov and the Congressional Budget Office.