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Seasonal summer job: What do you need to know about taxes?

During the summer, many students work seasonal jobs as swim class instructors, lifeguards or interns in a family business. For many it may be their first lesson in paying federal and California taxes.

Last year, we provided guidance to parents on paying wages when they hire a child. Here, we focus on tax consequences for teenagers and young adults.

The first question you probably have is whether you need to file a return. If you earn income of $6,300 or more in 2015, you must file a tax return. If you earn less, you still might want to file to get a refund on the taxes withheld by your employer.

One other option exists if you are certain you will earn less than the threshold and you plan ahead. You can file a W-4 with your employer to claim an exemption from tax withholdings. This will avoid federal and state tax withholding, but FICA and Social Security will still be deducted.

Freelancers and contractors

As a seasonal worker, your employer may want to hire you as a freelancer or independent contractor. In this situation, your employer will not withhold taxes from your pay. You'll receive a 1099-MISC from your employer for payments that exceed $600

You must file a tax return and pay self-employment tax on all income that exceeds $400 or you could face a possible audit and penalties. For this reason, it is often easier to work as a W-2 employee.

Putting some of your summer earnings into a Roth IRA is a smart way to save early for retirement. A Roth IRA is an investment account that earns dividends and capital gains over the years. Then you can take out money tax-free in retirement. Thinking about distant retirement as a teenager or while in your twenties is tough, but it can pay off.

Source: CBS MoneyWatch, “Summer jobs and tax questions,” Ray Martin, June 23, 2015

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