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While School Is Out, Summer Employment Is In: Tax Tips for Students

June 11, 2024

While School Is Out, Summer Employment Is In: Tax Tips for Students

June 11, 2024

Read below

A little planning this summer can pay dividends come tax time next April, and potentially much larger dividends come retirement.

Employment during the summer is a great opportunity for students to build a resume, gain experience, create valuable connections and develop some financial independence. Summer jobs can also provide students with spending money, assist with college tuition payments (or perhaps more realistically, one semester of books), start a retirement plan (e.g., 401(k), Roth IRA, simplified employee pension (SEP)) and potentially offer practical experience for a future career. Summer employment offers experiences that are often not available or cannot be replicated in a classroom.

Along with such benefits, summer employment will introduce students to a five-letter word that up until this point in life probably had very little meaning, but will affect them regardless of the amount of income earned—taxes! They will soon learn the reality that earning $20 an hour does not equal to $20 an hour in their pockets. 

Here are a few notable tax tips for students with or contemplating summer jobs: 

Employee Paperwork

When you secure that new job, you will need to complete IRS Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to determine how much federal income tax to withhold from your pay. The lower the number of “exemptions” claimed, the higher your income tax withholding. Conversely, the higher the number of “exemptions” claimed, the lower your income tax withholding. Irrespective of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at a 6.2 percent and 1.45 percent rate, respectively, and is not available for refund unless you earn more than $168,600 this year. A student should be so lucky. Calculations to determine proper withholding can be cumbersome and confusing. If you’re not sure, connect with us.

If you are treated as an employee, your employer withholds tax from your paychecks. If you are treated as self-employed (think Uber, babysitting, lawn care, painting, consulting), you may have to pay estimated tax directly to the IRS on a quarterly basis. If you earn $400 or more, you will need to file a federal tax return (and remit self-employment tax―see below).

Self-Employed Individuals

Like many students, you may have multiple informal jobs, whether through an app such as DoorDash, GrubHub or Uber, or more “traditional” summer jobs such as an ice cream shop, babysitting, lawn care, landscaping, painting, swimming lessons, web and social media consulting and the like. Earning $400 or more from one or more of these sources may subject you to self-employment tax reporting. As self-employment income can be offset by qualified expenses incurred for the production of the self-employment income, it is crucial to keep detailed records of receipts and expenses incurred and paid, preferably by activity. Also, be aware of the hobby loss rules, which limit (or completely disallow) the deduction of losses from income when there is no profit motive. The hobby loss rules are complex and caution is advised. Be sure to connect with us if you suffer losses from self-employment activity. Under either an employee or self-employed situation, it is prudent to set aside money to pay the tax that may be due when the returns are filed. Otherwise, you could be subject to late payment penalties, underpayment penalties and interest charges, which can be onerous, with IRS underpayment interest currently at a 16-year high (set at the federal short-term interest rate plus three percentage points).

Employed by Parent

Working with mom or dad has many nontax and tax benefits. From a tax perspective, bona fide wages (work performed by the child must be legitimate and the child's salary must be reasonable) paid by a parent to a child who is under the age of 18 are not subject to Social Security and Medicare taxes, or federal unemployment tax. Wages parents pay to their child who is 18 years or older, but under 21, are likewise not subject to federal unemployment tax. Additionally, parents may claim the child’s wages as a deductible business expense, provided the child is treated as a regular employee, wages are paid in dollars (as opposed to food, shelter, etc.) and a W-2, Wage and Tax Statement, is filed.

The result? You turn high-taxed income into tax-free or low-taxed income, achieve Social Security tax savings (depending on how your business is organized) and may make retirement plan contributions for your child. For example, if the business has a SEP, a contribution can be made for the child up to 25 percent of his or her earnings up to $69,000 for 2024.

Tip Income

The service industry is where many students land summer employment and where compensation is primarily tip-driven. All tip income is taxable. Any cash tips of $20 or more per month are required to be reported to the employer. Also, you must report all of your yearly tips on your tax return.

The key to accurately reporting tip income is organization and detailed recordkeeping. In the event of an IRS audit targeting unreported tip income, interest and penalty assessments can be significant. There are a variety of recordkeeping techniques and resources available to assist with accurate reporting of tip income, including tip-tracking apps. Popular apps, such as TipSee, ServerLife, Waiter Pal and Tip Tracker, may help keep track of daily, weekly and monthly tips as they are earned and recorded.

Out-of-State Employment Adds Complexity

Another consideration to keep in mind while engaged in seasonal employment is job location. Physically working in one state but residing in another state can add certain complexities to tax reporting, including the filing of additional state income tax returns―except for Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming, which impose no state income tax. In most states, taxes will be withheld and paid to the state of employment. 

However, reciprocal agreements, which many states have in place with neighboring states, eliminate the need for nonresident state tax withholding from the wages of nonresident seasonal employees―and some of the complexity. For example, if you reside in Pennsylvania but work in Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia, the out-of-state employer should withhold Pennsylvania income taxes with no taxes withheld or paid to that employer’s state. The table below summarizes states with reciprocal agreements presently in place.

States with Reciprocal Agreements

Resident state

Working state

Any state

District of Columbia


California, Indiana, Oregon and Virginia


Iowa, Kentucky, Michigan and Wisconsin


Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin




Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin


District of Columbia, Pennsylvania, Virginia and West Virginia


Illinois, Indiana, Kentucky, Minnesota, Ohio and Wisconsin


Michigan and North Dakota


North Dakota

New Jersey


North Dakota

Minnesota and Montana


Indiana, Kentucky, Michigan, Pennsylvania and West Virginia


Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia


District of Columbia, Kentucky, Maryland, Pennsylvania and West Virginia

West Virginia

Kentucky, Maryland, Ohio, Pennsylvania and Virginia


Illinois, Indiana, Kentucky and Michigan

If you are working in a state without a reciprocal agreement with your resident state, you will be subject to both resident and nonresident state income taxes. For example, if you reside in Pennsylvania but work in New York, you will need to file in both states. However, in most cases a credit for taxes paid to the nonresident state will be available on your resident state tax return subject to certain limitations. Multistate tax reporting is complex and rules vary from state to state, so be sure to seek guidance if you find yourself in this situation.

Retirement Planning

It is never too early for retirement planning and wealth accumulation. The power of compounding is magical. Students with summer jobs should strongly consider contributing to a Roth IRA, even if the parents have to chip in to help. Since contributions to a Roth IRA are funded with after-tax dollars, they provide for tax-free growth and, more importantly, tax-free distributions in retirement. Assuming the student’s income does not exceed income limitations (starting at $146,000 for single filers), the only eligibility requirement to contribute to a Roth is that the contribution must not be more than the earned income of the student. For 2024, you can contribute up to the amount of money earned for the year, with a maximum contribution of $7,000. As an example to demonstrate the power of compounding, a yearly contribution of $7,000 for six years followed by no additional contributions for 40 years until retirement results in a whopping balance of over $650,000 come retirement, assuming 6.5 percent annual growth. And that can be withdrawn tax-free under present law.

TAG’s Perspective

Summer is a time for fun and relaxation, as well as an opportunity for high school and college students to gain valuable working experience and build a resume while making some money to lighten the financial burden of parents, start a savings program, fund a retirement plan and start their careers on solid financial footing. With proper tax planning, including withholding, estimated tax and multistate tax strategies, along with a smart financial plan design, this summer can be memorable for many reasons.

For Further Information

If you would like more information about this topic or your own unique situation, please contact John I. Frederick, Steven M. Packer or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.