Seems that many high school and college aged kids are incorrectly having federal and state income taxes withheld from their summer job wages. Please note that a working child will generally owe no federal income taxes unless wages earned exceed $12,400 (in 2020) or investment income exceeds $350 while total income exceeds $1,100. Most kids, therefore, end up getting back all of the federal and state income taxes withheld during the year by filing a tax return the following winter.
The IRS wants to help parents of working children avoid the headaches and costs of preparing tax returns for their kids who won’t earn enough to be taxed. All you need to do is have your child write the word “Exempt” below Line 4(c) of new the Form W-4 that is generally completed the first day of employment. Below is what the IRS states in their instructions to the Form W-4:
Exemption from withholding. You may claim exemption from withholding for 2020 if you meet both of the following conditions: you had no federal income tax liability in 2019 and you expect to have no federal income tax liability in 2020. … To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4 in the space below Step 4(c). Then, complete Steps 1(a), 1(b), and 5. Do not complete any other steps.
Do yourself and your kids a favor by having him or her write the word “Exempt” under Line 4(c) of the W-4 form. While you’re at it, go to your state’s tax department website and see if your child is exempt from state withholding too. Your working child will have more money to spend sooner (and will hopefully ask you for less of your money during that time) since no federal income taxes will be withheld from their wages. And you won’t get stuck preparing a 1040-EZ for your child or paying your CPA $125 or more so your kid can get back taxes unnecessarily withheld. For more info and instructions, please watch our new video at: https://www.youtube.com/watch?v=FUM57dDB_KM&feature=youtu.be.
And While You’re at It, Fund a Roth IRA For Your Kids
Don’t forget that your kids (or you on their behalf) can contribute the lesser of their W2 income or $6k into a Roth IRA for 2020 by 4/15/21. Roth IRAs offer working children decades of tax-free growth.