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Federal Employees News Digest : June 24, 2013
T he summer has started and for many children of federal employees, this means a summer job. While summer vacation can mean a complete break from learning, students with jobs this summer have the opportunity to learn some valuable financial les- sons, in particular, those regarding paying taxes and getting in the habit of saving money. The following are some financial planning recom- mendations for children who are working this sum- mer: Federal and state income taxes. As an employee, a child will need to complete IRS Form W-4 (Employee's Withholding Allowance Certificate) and an equivalent state withholding allowance certificate if the child lives in a state with an income tax. Employers use this form to determine how much in federal and state income taxes are withheld from an employee's paycheck. It is important to complete these forms correctly so that the employer withholds the correct amount of income taxes. Individuals can go to the IRS's "Withholding Calculator" tool at www.irs.gov/Individuals/ IRS-Withholding-Calculator to help them fill out the W-4 form. Tips. Children receiving tips as part of their income are reminded that tips are considered taxable income. As such, they should keep a daily log to record their tips. If an employee receives $20 or more in cash tips in one month, the employee must report the tips for that month to his or her employer. Self-employment taxes. Children who are earning money this summer doing "odd jobs," such as babysitting and lawn care, are con- sidered self-employed. Self-employment income is subject to federal and state income taxes and Social Security (FICA) and Medicare Part A (hospital insurance) payroll taxes. Self-employment income is reported on IRS Form Schedule C when the child files taxes next spring. Building up Social Security benefits. While a child may not earn enough money from a summer job to owe federal and state income taxes, the child will probably have to pay FICA taxes. As such, the child is contributing to the Social Security system and building up their future benefits. During 2013, if the child earns or has net self- employment income of $1,160, then the child will earn one credit of Social Security. If the child earns at least $4,640, then the child has earned the maximum four credits for 2013. The benefit of a parent hiring a child. If one of the child's par- ents runs a business in the form of a sole proprietorship, then a technique for "shifting income" to a child is for the parent to employ the child in the business. Assuming the compensation paid to the child is reasonable relative to the work performed, the salary paid to a child under age 18 from a parent's sole proprietorship is exempt from FICA taxes. In addition to the child's wages being taxed at the child's lower tax rate, a child may shelter from federal and state income taxes all or a portion of the wages with the standard deduction, as the following example illustrates. Frances hires her 14-year-old daughter, Samantha (who qualifies as her dependent), to work in the stock- room of her clothing boutique. Samantha is paid $10 per hour, which is reasonable for the type of service she is able to perform. During 2013, Samantha earns $1,800 in wages from the boutique. Her only other income is $100 in interest income. Samantha's standard deduction shelters her wages from taxes and no Social Security taxes are withheld, as well as her interest income. (See calculations below.) Note: Compensation paid to a child in a family business must be reasonable for the work performed. It is therefore important to maintain records supporting the type of work performed and the amount of time worked. Also, child labor provisions of the Fair Labor Standards Act limit the hours that chil- dren can work. Saving for now and for the future. Children are encouraged to save part of their salary to pay some of their current expenses---for example, clothes, entertainment and school supplies---and another portion of their salary to save for their future retirement. Parents are encouraged to explain to their child why it is important to have a portion of their salary deposited each week in a bank or credit union savings account. Establishing and contributing to an IRA in a child's name can be an effective planning technique for a child with earned income. Contributing to an IRA can enable a child to: (1) shelter current income from taxes when money is deposited into a tradi- tional deductible IRA; and (2) start building a retirement account that will have many years of tax deferred---or in the case of a Roth IRA---tax-free growth. For 2013, any individual younger than age 50 with earned income can contribute to an IRA the lesser of $5,500 or 100 percent of their earned income. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Some financial planning advice for children working this summer June 24, 2013 Vol. 62, No. 47 8 Visit us on the Internet at www.FederalDaily.com Wages $1,800 Interest income $100 Total gross income during 2013 $1,900 Less: Standard deduction in 2013 [Greater of: (1) $1,000 or (2) earned income plus $350, not to exceed $6,100] ($2,150) Personal exemption (being claimed as a dependent) $0 Taxable income during 2013 $0
June 17, 2013
July 1, 2013