Summer Job Tax Tips
Summer is here, and that means young adults and college students are looking for new summer jobs. Even though the economy still hasn’t recovered and unemployment is high, there are still a lot of seasonal jobs out there. Of course with earning money comes paying taxes, so at the very least you want to maximize your money this summer.
Check Your Status
There are two possible ways you can be classified: employee or contractor. It makes a big difference, so pay attention to which one you are. As an employee you will have taxes taken directly out of your paycheck and then get a W-2 at the end of the year. Not so if you’re a contractor. Instead you get paid the full amount and are then responsible for paying income and payroll taxes on what you earned. This can trip people up if they get surprised with a tax bill come April. Learn more about how tax implications of life changes like a job change can be handled easily with tax software.
If you are an employee that means you’ll be filling out a W-4 when you start work. This form tells your employer how much money to withhold from your paycheck. Filling this out properly will ensure you’re only giving Uncle Sam as much as he needs, making your paycheck larger. Also, if you worked last year and got a refund for the entire amount that was withheld and expect the same this year, you can claim exempt and not have any income tax withheld.
Keep Good Records
It’s easy to think that just because you may have part-time employment there’s little to keep track of, but it pays to keep good records. Keep your pay stubs, track cash tips (yes, that is taxable income), and any expenses related to your work. This will help ensure you and your employer are on the same page come tax time. Mistakes can happen and the more records you keep, the easier it will be to catch it before it becomes a hassle.
Create Automatic Savings
While a seasonal job may not make you rich, you should still put some of that money to work by saving it. If your employer has direct deposit you should set it up and direct part of your paycheck into a savings account. Even if it’s just $25 per paycheck, over the course of the summer you’ll then have a nice little savings account set aside. If you don’t have direct deposit just swing by the bank and set up a savings account and then create an automatic and recurring transfer from checking into savings. If you put this savings on autopilot you’ll never forget to pay yourself first.
Take Advantage of Retirement Accounts
For students and young adults retirement is about the last thing on their mind, but it shouldn’t be. The magic of compound interest needs time to work, and the more time you have the more your money can grow. So even though retirement may be forty years away it’s not too early to tuck a little away into a retirement account. For one, there are tax benefits. Traditional IRAs or a 401(k) give you a tax break up front on the contributions. Or go with a Roth IRA and your money has the luxury of growing for years and then withdrawn completely tax-free. It may not be the most exciting use of money now, but you will thank yourself when you’re older.