Income tax isn’t just for adults. If you've got a go-getter child, you're probably wondering if they have to pay taxes too.
Yes, children are also responsible for paying income tax.
If your child has earned income, such as income from a summer job, they might need to pay income tax.
If your child has unearned income, such as income from investments, they might also need to pay income tax.
- The different types of earned income for children
- When taxes are due
- Relevant tax credits
- How children can best save their earnings
Earned Income From an Employer
If your child has earned income, they might need to pay income tax.
The IRS does not require dependents to pay income tax unless their income is higher than a certain level.
These income levels are listed in IRS Publication 929, Tax Rules for Children and Dependents.
IRS Publication 929 for the 2018 tax year has not yet been released.
For the 2017 tax year, the income levels were as follows:
- Single dependents under 65 and not blind: $6,350
- Single dependents over 65 and/or blind: $7,900
- Single dependents over 65 and blind: $9,450
- Married dependents under 65 and not blind: $6,350
- Married dependents over 65 and/or blind: $7,600
- Married dependents over 65 and blind: $8,850
This means that children who are not blind can earn as much as $6,350 without paying income tax. Children who are blind can earn $7,900 without paying income tax.
In 2017, the income levels were tied to the standard deduction, which was $6,350 for single people and married couples filing separately.
It is assumed that in 2018, the income levels will rise to match the updated standard deduction, which is $12,000 for single people and married couples filing separately.
Note: This adjustment has not been confirmed by the IRS, but if it proves to be the case, your child will be able to earn nearly twice as much money before they have to pay income taxes.
If your child worked at a job where income tax was taken out of their paychecks, they should complete an income tax return even if their income did not exceed the IRS income level.
This way, they can receive any tax refunds to which they are entitled.
Earned Income From a Family Business
If your child earns income by working for a family business, they should follow the guidelines above to determine whether they should pay income tax.
If you are your child’s employer and your business is a sole proprietorship or a partnership in which both partners are the child’s parents, be aware that you are not required to withhold FICA taxes from your child’s paycheck if your child is under 18, and you are not required to pay unemployment taxes if your child is under 21.
Those rules are designed to benefit both your business and your child, who will probably see a slightly larger paycheck!
Earned Income From Self-Employment
Some children and teenagers earn money from jobs they create themselves, whether they babysit, mow lawns, or take up freelance web development.
Here's the deal:
If your child earns more than $400 in net profit (revenue minus expenses), they are required to file income taxes.
If your child earns enough income from self-employment that they’ll owe over $1,000 in taxes, they should file quarterly estimated taxes.
Paying estimated taxes
This means they need to estimate how much tax they’ll owe on a full year of income and pay that tax in four installments throughout the year.
Many self-employed individuals set aside a percentage of each paycheck for estimated taxes (often 25% or 30%).
Paying quarterly estimated taxes helps self-employed individuals because they are not stuck with a large tax payment at the end of the year.
If they estimate high and pay more in estimated taxes than they actually owe, they’ll receive a tax refund.
Paying estimated taxes can also help self-employed people avoid penalties for underpaying their taxes.
If your child receives income from investments, such as dividend income, they may need to pay income tax.
They may also need to pay income tax if they earned a significant amount of interest on a bank account.
The IRS does not require dependents to pay income tax on unearned income unless that income passes a certain level.
As with earned income, these income levels can be found in IRS Publication 929, Tax Rules for Children and Dependents. Here are the unearned income levels for the 2017 tax year:
- Single dependents under 65 and not blind: $1,050
- Single dependents over 65 and/or blind: $2,600
- Single dependents over 65 and blind: $4,150
- Married dependents under 65 and not blind: $1,050
- Married dependents over 65 and/or blind: $2,300
- Married dependents over 65 and blind: $3,550
If your child is not blind, they can have up to $1,050 in unearned income before they need to pay income tax. If your child is blind, they can have up to $2,600 in unearned income before they need to pay income tax.
These income levels may rise in 2018, but the IRS has not yet confirmed the new numbers.
Earned and Unearned Income
Some children have both earned and unearned income.
To determine whether they need to pay income tax, they (or their parents) should fill out the IRS Filing Requirement Worksheet For Most Dependents.
Most dependents will need to file income tax on both earned and unearned income if their gross income (both earned and unearned) is more than the larger of the following numbers:
- Earned income (up to $6,000) plus $350
That sounds confusing, so let’s make it a little clearer.
If a child has $5,000 in earned income and $250 in unearned income, their gross income is $5,250.
To determine whether they need to pay income tax, the first thing they need to do is add $350 to their earned income of $5,000.
Then they need to ask themselves which number is larger: $1,050 or $5,350. $5,350 is larger.
Then they need to ask whether their gross income of $5,250 is larger than $5,350.
Their gross income of $5,250 is not larger than $5,350, so they do not need to pay income tax on their earned and unearned income.
Let’s look at another example.
If a child has $600 in earned income and $1,000 in unearned income, their gross income is $1,600.
To determine whether they need to pay income tax, they should add $350 to their earned income of $600.
Then they need to ask themselves which number is larger: $1,050 or $950. $1,050 is larger.
Then they need to ask whether their gross income of $1,600 is larger than $1,050.
Their gross income is larger, so they need to pay income tax on their earned and unearned income.
The IRS Filing Requirement Worksheet for Most Dependents takes you step-by-step through this process, so don’t worry!
As before, if your child had income tax taken out of their paycheck, they may still want to file an income tax return even if they are not required to. That way, they’ll get any tax refunds to which they are entitled.
If your child qualifies for any of the following tax credits, they should file a tax return even if they are not required to:
- Earned income credit
- Additional child tax credit
- Refundable American opportunity education credit
Those credits will very likely help your child get a tax refund, so make sure to file if they are eligible.
Traditional and Roth IRAs
Here's the good part:
If your child has earned income, they are eligible to contribute to a traditional or Roth IRA.
Some states do not allow minors to open IRAs, but you can open a custodial IRA on your child’s behalf.
The advantage of the traditional IRA is that contributions are generally tax-deductible.
Your child will probably pay less tax on their income if they make traditional IRA contributions.
However, they will have to pay tax on traditional IRA withdrawals when they hit retirement age.
Roth IRA contributions are not tax-deductible. The advantage of the Roth IRA is that withdrawals are tax-free, and your child can withdraw their contributions before they reach age 59 ½.
If you have additional questions about whether your child needs to pay income tax, it’s best to consult a CPA or tax professional.
Tax law can be complicated, so make sure you have all of the information you need to ensure your child fulfills their tax responsibility.