Child’s new job at 18 years old

[DolledUp123]

My 18 year old just started a job and is getting paid in cash. Is that good? I mean they don’t mind it of course but I feel they should fill out a W-4 form and get direct deposit. Also to have Medicare and social security taken out for in the long run you know. Any advice would be appreciated. Thanks 

[VolvoGirl]

Getting paid in cash shouldn’t matter.  As long as they take out the deductions like SS & Medicare.  Do they give him a pay stub showing any deductions?  He better ask them if he will get a W2 or 1099NEC at the end of the year for his pay.   If they didn’t have him fill out a W4 did they give him a W9 to fill out?  They need his ssn.  

If they pay him in cash and pay him as a 1099 independent contractor that is different and could be a problem.   Even if they don't give him a 1099NEC he needs to keep his own records of the income and report it as self employment income on Schedule C in his tax return.   He will pay Self Employment tax to cover the SS and Medicare.  He should send in quarterly estimated payments to cover the tax due on it if they don't take out any withholding.

If he has to file as self employment, he is considered to have his own business for it. The people or company that pays you is your customer or client.  He can also deduct any expenses for it on Schedule C.

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

You pay Self Employment tax on $400 or more of net profit from self-employment in addition to any regular income tax.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

needs to keep

[Mike9241]

if the child did not fill out W-4 the business is treating her as independent contractor. if they're treating the child as an independent contractor a W-9 should have been completed. if neither, that may be an indication they don't intend to file either a W-2 or 1099-NEC.  Neither would be improper for them. The child would still need to report the income.

As an independent contractor she would have to file schedule C and pays 100% of the social security and Medicare taxes (self-employment taxes). As an employee they would have 50% of these taxes taken out of their paycheck and the employer contributes the other 50%. also, as an independent contractor there would no withholding taxes taken out, so when filing their return for the year they could owe income taxes on top of the self-employment taxes.

for your own purposes you could use IRS form SS-8 (read the instructions) to check employee/independent contractor status.  If you determine they should be classified as an employee but are treating the child as an independent contractor, you could file the form with the IRS but that could result in them losing the job.

 https://www.irs.gov/forms-pubs/about-form-ss-8 

[Hal_Al]

People who file as independent contractors (Schedule C) are allowed a 20% Qualified Business Income deduction (exclusion).  Depending on his/her total income (how much over the standard deduction), that may make up for the "extra" 7.65% social security and medicare tax he has to pay.

[Hal_Al]

A question you didn't ask is: can he still be your dependent now that has has a job?

There are two types of dependents, "Qualifying Children"(QC) and Other ("Qualifying Relative" in IRS parlance even though they don't have to actually be related). There is no income limit for a QC but there is an age limit, student status, a relationship test and residence test.

A child of a taxpayer can still be a “Qualifying Child” (QC) dependent, regardless of his/her income, if:

1. He is under age 19, or under 24 if a full time student for at least 5 months of the year, or is totally & permanently disabled
2. He did not provide more than 1/2 his own support. Scholarships are excluded from the support calculation
3. He lived with the parent (including temporary absences such as away at school) for more than half the year

So, it doesn't matter how much he earned. What matters is how much he spent on support. Money he put into savings does not count as support he spent on himself.

The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.

The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf

With the tax law change, effective 2018, most dependents will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased. 

[Opus 17]

"My 18 year old just started a job and is getting paid in cash."

There are several possibilities.

Your son is being treated as an independent contractor.  In this case your son is considered self-employed.  He must report and pay tax on his income, and will also pay his own social security tax, so he will be in the system.  He must set aside part of his pay to make estimated tax payments, instead of having withholding.  The person paying him is supposed to issue a 1099-NEC at the end of the year if he is paid more than $600, and your son should be asked to provide his SSN to the employer on a W-9 form.

Whether your son is legitimately an independent contractor, or is an employee who is being misclassified, depends on his duties, and who controls the time, place and manner of his work. See here for more.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

If your son believes he is being misclassified as an independent contractor when he is really an employee, he can file a form SS-8 to start an investigation.  If the employer is found at fault, the employer can face substantial penalties.  Your son can also (separately) file a complaint with your state labor board.

The employer could be paying your son "under the table" and has no plans to issue a 1099-NEC or W-2.  This is obviously illegal.  Your son could skip out on paying taxes (without a 1099 or W-2, your son is on the honor system to report their income), but the employer is probably doing other improper things as well, possibly related to wage and hour rules, benefits, on the job safety, and who knows what else.  Your son could file a complaint with the state and the IRS, but he would be better off finding someone honest to work for instead.

It is also possible that this is a legitimate employer who gives real pay stubs, withholds tax, will give a W-2 at the end of the year, and just chooses to pay the net amount after withholding with cash.  But this seems unlikely especially if your son never filled out a W-4.