Many teenagers make money by babysitting for neighbors and friends. Babysitting is a terrific job for a teen and has some tax advantages that you may not know about:

Several years ago a special category of workers was created called household employees. Parents reading this may remember that during the 1990’s, several federal cabinet appointees were found to be in violation of tax rules concerning their household help, specifically nannies and gardeners. Congress addressed the issue by updating and enforcing the “nanny tax,” so that employers would start paying Social Security and Medicare taxes on their hired nannies.

Suddenly, Americans started asking about their teenage babysitters. Would they be required to pay employer taxes on their 15-year-old neighbor girl so they could have a night out? It seemed pretty ridiculous.

Fortunately, sanity prevailed and there are exceptions to the nanny tax rules! An employer does not have to pay employer taxes if these three conditions exist:

• the employee is under age 18 at any time during the year and
• the work is in or around a private residence as an employee and
• the employee’s main occupation is not providing house hold services.(For a teenager, their primary occupation is to be a student, not a babysitter.)

Should a teenager file his own tax return apart from his parents?

Usually, teenagers should file their own tax returns separate from their parents’ return.

If a teenager has earned income from a job or his own micro business, he should file his own return. A teenager’s earned income should not be added to his parents tax return. The parents will probably pay too much income tax if they add their teenager’s earned income to their return.

Most of the time, a teenager can still be claimed as a dependent on their parents’ tax return, even though he files his return separately.

The only time the IRS allows parents to include a child’s or teenager’s income on their tax return is for unearned income belonging to the child. Unearned income is income from investments such as interest on a savings account, dividends from stock or mutual funds and capital gains distributions from a mutual fund owned by the child or teenager.

Parents, if your child or teenager has unearned income, do not simply add it to your income. You must complete a Form 8814 Parents’ Election to Report Child’s Interest and Dividends. The IRS warns that electing to include your child’s investment income on your return could result in higher income tax.

For my tax clients, I always file a separate return for the teenager or child. It keeps things clearer by separating the income between the parent and child.

If you have been running a micro business, you need your own separate tax return. My book, Money and Taxes in a Micro  Business discusses the forms and gives several samples of tax forms for a teenage micro business owner.

Carol Topp, CPA

I want to start my own small business selling crafts. What (US) tax forms do I need to file?

Congratulations on living the American dream of being your own boss! Since you mentioned you are the only owner, your business will be a sole proprietorship. In the US, the owner of a sole proprietorship is considered self-employed and you will pay two types of taxes: income tax and self-employment tax. Self-employment tax is the same as Social Security and Medicare tax for self-employed people.

You will report all your income and expenses on an IRS form called Schedule C Profit or Loss from Business, which is part of the Form 1040. You should file your own tax return, separate from your parents. They can still claim you as a dependent on their tax return even though you file a separate return.

You will also fill out Schedule SE to calculate the self-employment taxes owned. The self-employment tax is 15.3% of your net income (profit). Many teens that own small businesses find that they may not owe federal income tax, but do owe self-employment tax. The threshold to start paying self- employment tax is $400 of net income (profit). So if you made over $400 in profit from a micro business, you need to fill out a Schedule SE and pay self-employment tax.

Keep good records of everything you earn and everything you spend in your business. This can help reduce your taxes. It is a good idea to talk to an accountant when you start your business. He or she will also be able to help you with issues like sales tax. 

My book, Money and Taxes in a Micro Business, covers taxes for business owners.

Price $9.95

Read  the Money and Taxes Table of Contents

View Money and Taxes Sample Pages

If you still have questions, I would be happy to answer them! Drop me a line at my contact page and we can get started.

Carol Topp, CPA

The Old Schoolhouse Magazine is offering their fall issue digital edition to read online.

My article on The Benefits of Starting a Micro Business–More Than Just The Money! is on page 144!

(click the picture to read the digital edition)