My 10-year-old son sets up a weekend lemonade stand at the local baseball field, where there are little league and adult softball games all day long. To my surprise, he makes as much as $100 per week selling refreshments. He asked me whether he has to pay taxes on this income or whether I need to pay taxes on his earnings. I didn’t know what to tell him.
–R. Green
Montclair, NJ
Congratulations are in order for raising such an enterprising young man. Get ready to teach your son a grown-up lesson about income tax.
Let’s say your budding entrepreneur set up his refreshment stand each weekend last summer–through June, July, and August. He potentially earned as much as $1,300. Believe it or not, the Internal Revenue Service requires self-employed children who make at least $400 per year to file an income tax return. According to IRS rules, your son, no matter what his age, is required to pay self-employment tax for Social Security and Medicare (at 15.3% of his net reported income), even if he eventually owes no income tax for 2010. He’s responsible for filling out and signing his own tax return. The 1040EZ is the form he’ll need. Also: check with your state on the specific filing rules for New Jersey.
Of course, you can still claim your kid as a dependent as long as you provide for at least half of the child’s support, and he lives with you for at least half of the year. For more information, see IRS Publication 929, “Tax Rules for Children and Dependents†at www.irs.gov.
This Q&A appears in the September 2010 issue of Black Enterprise in Moneywise.