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Teens and young adults often go into business for themselves over the summer or after school. This work can include babysitting, lawn mowing, dog walking or other part-time or temporary work. When a teen or young adult is an employee of a business, their employer withholds taxes from their paycheck. However, when they are classified as an independent contractor or are self-employed, they’re responsible for paying taxes themselves.
The IRS suggests a few things to keep in mind:
Here’s what young entrepreneurs can do to keep on top of their tax responsibilities:
Keep records. It’s good to make and keep financial records and receipts during the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.
Pay estimated tax, if required. If a teen or young adult being claimed as a dependent expect to owe at least $1,000 in tax for 2022, they must make estimated payments on a quarterly basis. They should be sure to pay enough tax on time to avoid a penalty.
If a taxpayer also has a job where tax is withheld by their employer, they can request that their withholding be increased to cover their estimated taxes from their self-employed income. That way, they don’t have pay estimated tax separately.
File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records to their tax return. When preparing to file a tax return, they should make sure to review all their records, including estimated tax they’ve already paid.