5 IRS Tips For Kids With Summer Businesses
 By Stephen A. Lanvil

If you’re the parent of an industrious child who started a business for extra income during the summer, the Internal Revenue Service has a few facts you should know.

1. Most youngsters will have to pay taxes on their summer income.

2. Whether your child works as a waiter or runs her own baby-sitting business, she may receive tips as part of her summer income. All tip income she receives is taxable income and subject to federal income tax.

This includes tips customers given to her directly, tips customers charge on credit cards that her employer gives her, and her share of tips split with other employees.

Your child should keep a daily record or other proof of his tips. He can use Form 4070A, Employee’s Daily Record of Tips. The daily record must show:

• Your child’s name and address
• The employer’s name
• The establishment’s name

For each day worked, your youngster must show:

• The amount of cash and charge tips he received from customers or other employees
• A list of the names and amounts he paid to other employees through tip splitting
• The value of any noncash tips he received, such as tickets or other items of value

3. If your kid operated a summer business, earnings he received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting, lawn mowing and house painting.

4. If your child has net earnings of $400 or more from self-employment, she’ll also have to pay self-employment tax. This tax pays for her benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured and reported on Form 1040, Schedule SE.

5. Special rules apply to services that kids perform as a newspaper carrier or distributor. Your child is a direct seller and treated as self-employed for federal tax purposes if he meets the following conditions:

• He’s in the business of delivering newspapers
• All his pay for these services directly relates to sales rather than to the number of hours worked
• He performs the delivery services under a written contract which states that he will not be treated as an employee for federal tax purposes

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Get More Information
If you need more information about your youngster’s taxable summer income, check out IRS Publication 525, Taxable and Nontaxable Income. You can download it for free at http://www.irs.gov.

AFS Can Help
As an AFS Member, you have unlimited access to the certified public accountants at ProTax—at no additional charge.

The CPAs are just a mouse click away through the AFS website. And they can answer all of your tax questions about your youngster’s summer income, such as:

• What kinds of records to keep to substantiate income and expenses for a summer business
• How, when and where to report tip income
• What forms to use to report self-employment income
• How, when and how much to withhold for federal income tax

Contact ProTax today to get confidential answers to all of your tax questions.


(Posted August 2010)

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