"Sometimes teens go out and work as technical employees, but are paid as contractors," says Sharon Lechter, a CPA in Paradise Valley, Arizona, and a former member of the inaugural President's Advisory Council on Financial Literacy. "So make sure the employer classifies you correctly."
Pushing the worker categorization boundaries is appealing to some companies who then don't have to deal with various tax withholdings and potential employee benefit payments. And young workers looking to pocket as much cash as possible each payday might think such an arrangement advantageous, too.
But being a contractor poses new, and costly, tax concerns.
Contractor tax complications
If paid as a contractor, which means earnings are reported to the worker and the IRS on a Form 1099-MISC rather than a W-2, the youth is, for tax purposes, self-employed.
That designation means that even if the young worker doesn't earn enough to owe federal income taxes, he or she could owe Uncle Sam self-employment, or SE, taxes.
This is the 15.3% tax on earnings that is the self-employed equivalent to Social Security and Medicare payroll taxes withheld from employees' checks and usually noted as FICA on pay stubs. That tax is required when any self-employed worker's net earnings exceed $400.
"There is no special tax treatment for teenagers running their own business," says Carol Topp, a Cincinnati CPA who is also the founder of TeensAndTaxes.com. "If you make a profit of more than $400, you must pay self-employment."
The frustrating thing about self-employment taxes is that while the income tax earnings threshold usually is adjusted each year for inflation, the $400 SE trigger is firm. And that low level often poses tax problems for young entrepreneurs, even if they don't make enough to mandate they pay income tax on their earnings.
That was the case for one of Topp's daughters. "She offered piano lessons and didn't make enough to file a tax return, but owed $80 in self-employment," says Topp.