College and high school students considering working over the summer should ensure they understand taxable income to avoid confusion next tax season.
Most often, taxes are withheld from an employee’s paycheck. However, students may encounter situations where their taxes are not withheld, and they would need to pay taxes directly to Indiana’s Department of Revenue or the IRS.
When a student is a new employee to a business, the employer may withhold taxes from their paycheck. The employee fills out Federal Form W-4 and State Form WH-4. To help taxpayers accurately complete the federal form, the IRS has an online Withholding Calculator at www.irs.gov/individuals/irs-withholding-calculator. By ensuring the correct amount of tax is being withheld, taxpayers avoid an unexpected tax bill or penalty at tax time next year. Social Security and Medicare taxes will also be withheld from their income by their employer.
Students who exchange services for cash directly from another individual, such as babysitting or lawn care, are classified as self-employed. Income earned from self-employment is subject to income tax, and workers who are self-employed may be responsible for paying taxes directly to DOR and the IRS. Taxes can be paid by making estimated tax payments during the year or when filing taxes. Taxpayers who are self-employed should keep good records of all funds they receive.
In addition, employees who receive tips as part of their summer income need to report those tips when filing taxes. Tip income is taxable and any amount over $20 in a month needs to be reported to an employer. Keeping a daily tip record will help come tax time.
If a taxpayer is in a Reserve Officers’ Training Corps (ROTC) program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive — like food and lodging allowances paid to ROTC students participating in advanced training — may not be taxable.
More information can be found on DOR’s Student Taxes website at www.in.gov/dor/4751.htm.
Customers may call DOR Customer Service at 317-232-2240, Monday through Friday, 8 a.m. 4:30 p.m. EST with any questions or concerns.