Are you a student with a summer job or the parent of a student with a summer job? Here are seven things you should know about the income earned by students during the summer months.

1. All new employees fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure the withholding is correct, don’t hesitate to call.
2. Whether you are working as a waiter, valet, or a camp counselor, you may receive tips as part of your summer income. You should be aware that tips are considered taxable income and subject to federal income tax. Employees should keep a daily log to accurately report tips and they must report cash tips to their employer for any month that totals $20 or more.
3. From pet sitting to mowing lawns and pulling weeds, many students do odd jobs over the summer to make extra cash. If this is your situation, keep in mind that the earnings you receive from self-employment are subject to income tax.
4. While some students may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. This tax pays for your future benefits under the Social Security system.
5. Net earnings of $400 or more from self-employment is taxable, as is church employee income of $108.28 and is reported on Form 1040, Schedule SE. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages.
6. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay such as pay received during summer advanced camp is taxable.
7. Special rules apply to services you perform as a newspaper carrier or distributor. Please call the office if you’d like more information about this.

Small business owners are reminded that tax reform legislation lowered the backup withholding tax rate to 24 percent. In addition, the withholding rate that usually applies to bonuses and other supplemental wages was also lowered to 22 percent. As such, employers should have their employees check their withholding.

Backup withholding. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the backup withholding tax rate dropped from 28 percent to 24 percent. This new rate was effective on January 1, 2018.

Backup withholding applies in various situations, including when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an employer identification number (EIN), individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

Backup withholding also applies (following notification by the IRS) where a taxpayer under-reported interest or dividend income on their federal income tax return. When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. This includes most payments reported on IRS Form 1099, such as interest, dividends, payments to independent contractors and payment card and third-party network transactions.

Payees may be subject to backup withholding if they:

• Fail to give a TIN,
• Give an incorrect TIN,
• Supply a TIN in an improper manner,
• Under-report interest or dividends on their income tax return, or
• Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.

To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the under-reported income and pay the amount owed, or file a missing return. Please call if you need more information about backup withholding.

Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. Forms 945 are generally due to the IRS by January 31. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.

Bonuses and other supplemental wages. The TCJA also lowered the tax withholding rates to 22 percent. This rate normally applies to bonuses, back wages, payments for accumulated leave and other supplemental wages. In most cases, the new rate was effective on January 1, 2018. Please note that for payments exceeding $1 million, the rate is 37 percent.

The key to avoiding headaches at tax time is keeping track of your receipts and other records throughout the year. Whether you use an excel spreadsheet, an app, an online system or keep your receipts organized in a folding file organized by month, good record-keeping will help you remember the various transactions you made during the year.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for audit. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property – should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return including but not limited to:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged, or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

Good record-keeping throughout the year saves you time and effort at tax time.