​Don’t Forget to Give Uncle Sam a Cut of that Lemonade Stand

​Don’t Forget to Give Uncle Sam a Cut of that Lemonade Stand

06/16/2022 Tags: Announcements

What’s better on a hot summer day than buying ice-cold lemonade from your neighbor kid’s stand?

You might want to tip them a little extra because that young entrepreneur could owe taxes on their profits.

Yep, ranking right up there with sunburns and bug bites is the government’s tax bill if a minor makes more than $400 in net earnings from their self-employment gig.

So, if your child’s mowing lawns, walking dogs, babysitting, or doing any other kind of work that classifies them as an independent contractor or are self-employed, they’re responsible for paying taxes themselves.

According to the IRS, here’s what mom and dad need to know:

  • If they owe taxes, your kid should file their own tax return, even if you claim them as a dependent.
  • Kids can prepare and sign their own tax return. There is no minimum age to sign a tax return.
  • Parents can’t claim a dependent’s earned income on their own tax return.
  • In addition to income tax, self-employed people are generally responsible for self-employment tax. It’s like the Social Security and Medicare taxes withheld from the pay of most wage earners.
  • Teens and young adults can lower the amount of tax they owe by deducting certain expenses.

Yeah, kind of a summer bummer. But even though paying taxes is not much fun, running a small business can teach kids valuable lessons they can use later in life.

For example:

  • Keep records. Make and keep financial records and receipts during the year. Recordkeeping can help kids track their income and deductible expenses and make it easier come tax time.
  • Figure out estimated tax. If your child that you claim as a dependent expects to owe at least $1,000 in tax for 2022, they have to make estimated payments quarterly. And they’ll need to pay enough tax on time to avoid a penalty.

These forms can help them calculate their estimated taxes:

  • File a tax return. When it’s time for tax season, young entrepreneurs should review all their info and forms and then e-file their tax returns.

For more details about kids and taxes, check out the IRS’s resource. And let us know if you have any questions about whether or not your young businessperson owes Uncle Sam.

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