It would be impossible to cover all scenarios regarding Federal Income Tax in this document. However, find below general information regarding child performers and Federal Income Tax regulations for 2015. Find additional suggestions in italics. This information is in no way intended to be a replacement for professional tax advice.
A minor child’s earned income (wages, etc). is taxable, and is taxable to the CHILD. A child who has income from earnings (as opposed to interest, etc.) must file their own tax return if they meet the filing requirements.
Records to Gather
You should receive a W-2 form from each employer, or a 1099. (employers are required to issue Form 1099 for royalty payments over $10, and for payment for services over $600). Note, if you have utilized a tracking form as suggested on this website, you will use that form to verify that you have received all of your income documents from employers.
Who must file?
For 2015, the filing requirement for children, for earned income only is $6,300. This means if the gross earnings of the minor child exceed that amount, they are required to file an income tax return. It is recommended that if the minor child had ANY earnings that were subject to federal or state withholding (i.e., if they deducted taxes) that you file a return for the minor even if they did not earn over $6,300. Not filing would result in forfeiting money withheld. However, filing and getting the refund will establish a tax record and paper trail for future years.
For 2015, the filing requirement for unearned income only (dividends, interest) is $1,050. This means if a child has earned interest or dividends (generally reported on 1099-int) totalling more than $1,050, they are required to file an income tax return. This requirement will be explained later, when discussing ‘kiddie tax’ penalty.
It is not uncommon for children employed in the print industry to have their compensation paid and reported on a 1099. This compensation is being handled as though the child is self-employed. Compensation paid and reported on a W-2 has been taxed, and the employer has paid their portion of employment taxes as well. Self employment income has not been taxed, nor has the employer paid employment taxes, because they are not applicable. Total income (combining all 1099's) exceeding $400, triggers a self employment taxation which is calculated and reported on Schedule SE, and also requires that the child file a Form 1040, rather than a 1040EZ. See links below to find more information about self employment tax calculations.
Note: For federal income tax purposes, the income a child receives for his or her personal services (labor) is the child’s, even if, under state law, the parent is entitled to and receives that income. If the child does not pay the tax due on this income, the parent may be liable for the tax. (IRS publication 929, page 4 – see link below)
Free E-file - taxpayers earning $54,000 or less in 2015 qualify for free e-filing of their returns thru the irs.gov site.
In most cases, the minor child will still qualify as being a dependant on another person’s tax return (the parent). The following information is provided for that scenario. The calculation for the standard deduction is as follows:
Minor child earned income + $350 (minimum $1,050 maximum $6,300)
Note: The minimum standard deduction for this scenario is $1,050– if earned income is less than $750 the standard deduction is $1,050. The maximum standard deduction for this scenario is $6.300– if earned income is more than $5,950 the standard deduction is $6,300.
A person who can be claimed as a dependent on another taxpayer’s return cannot claim his or her own exemption. (IRS Publication 929 – page 5) An exemption is a different deduction than the Standard Deduction calculated above.
The W-2’s prepared by the employer will indicate the amount of taxes withheld. Verify these amounts with the actual withholdings indicated on the individual pay stubs.
Excess Investment (Unearned) Income
If the minor child is under age 19 ( or 23 if a full time student) and had more than $2,100 in investment income, there is an additional step. If the minor child had less than $2,100 in investment income, skip this step. NOTE: Prior to 2006, the age at which this applied was 14. In 2006 it was increased to age 18. This process is commonly known as the ‘kiddie tax’. It is the mechanism that prevents adult parents from escaping taxation by investing money in their child’s name.
For most child performers, this should be a non-issue, however, in California children under the age of 18 can receive unemployment compensation. This income is reported on a form 1099-G, which unfortunately falls into the unearned income category for tax purposes. For that reason, the unemployment compensation may trigger the additional requirement of Form 8615. However, if this is due to only unemployment compensation, the calculation made by most tax software will be incorrect. (See more below) The formula for Form 8615 is as follows:
- The first $1,050 of investment income is exempt from federal income tax; remember the requirement for filing based on unearned income above?
- For investment income in excess of $1,050, but less than $2,000 the income is taxed at the child’s rate (10%).
- For investment income in excess of $2,000 the income over $2,000 is taxed at the parents rate (varied%). In order to complete this calculation you will need to know the parents tax information:
Parents taxable income
- Form 1040 – line 43 or
- Form 1040A – line 27 or
- Form 1040EZ – line 6
Parents tax due
- Form 1040 – line 44 or
- Form 1040A – line 28 or
- Form 1040EZ – line 10
The tax is calculated by taking the excess investment income of the minor child (amounts over $2,100) and adding that to the parent’s taxable income. That total is then used to recalculate the tax due (by multiplying the new total by the parents taxable percentage. (This can be found by dividing tax due into taxable income on the report lines indicated above). For example:
- Child investment income = $5,000
- Parents taxable income = $30,000
- Parents tax due = $6,000
- Parents tax rate = $6,000 / $30,000 = 20%
- Child investment income greater than $2,100 = ($5,000 - $2,100) = $2,900
- Child tax (at parents rate) $2,900 X 20% = $580
The end result is that the child is paying a higher tax percentage for this income than they would normally incur. We received a confirmation from the IRS that "Kiddie Tax" computations do not apply to unemployment compensation received by minors under age 18. Although most tax software programs will calculate the additional tax as outlined above, this is incorrect. The IRS does not recognize unemployment compensation as investment income. Consider filing the return by hand, and eliminating the penalty, or requesting that your tax preparer do so. We are still attempting to get this information in writing, as we receive many questions about this. Thusfar, communications with the IRS have indicated that a ruling is not necessary because tax law does not say unemployment in included, only the tax software misapplies it, in error.
Special note for 2015 filing - All unemployment compsentation is taxable. In 2009, the first $2,400 of unemployment compensation was non-taxable, but that provision did not continue for 2010, 2011 or 2012.
In addition to the standard deduction discussed above, minor children with income (earned and unearned) in excess of $6,300 may find it beneficial to itemize deductions. The federal tax code allows special consideration for actors – and those unique tax incentives fall under the heading of: Qualified Performing Artist Deductions. Note – this benefit is available to adult actors, as well.
If you are a qualified performing artist, you can deduct your employee business expenses as an adjustment to income rather than as a miscellaneous itemized deduction. To qualify, you must meet all three of the following requirements.
- You perform services in the performing arts for at least two employers during your tax year. (You are considered to have performed services in the performing arts for an employer only if that employer paid you $200 or more).
- Your allowable business expenses related to the performing arts are more than 10% of your gross income from the performing arts.
- Your adjusted gross income is not more than $16,000 before deducting these business expenses.
If you do not meet all of the above requirements, you must deduct your expenses as a miscellaneous itemized deduction subject to the 2% limit. If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing arts related expenses on line 10 of form 2106 or from line 6 of Form 2106-EZ on line 33 of Form 1040. Then write QPA and the amount of your performing arts related expenses on the dotted line next to line 33 (Form 1040). (IRS Publication 529 – page 12)
If the minor child has gross earnings less than $16,000 this is a very beneficial deduction. It allows for the business expenses to be deducted as an adjustment to income. For earnings in excess of $16,000 the business expenses are still deductible but will be reported as miscellaneous expense, and will be reduced by 2% of the gross earnings.
List of Common Performing Artist Expenses
More information regarding expenses
Be certain to follow IRS standards regarding record keeping, and preservation of receipts. The child may issue a 1099 if they paid anyone in excess of $600 for personal services. (Employer ID information would be necessary to file the Form). Expenses paid for by the child must be reported in the year they were incurred.
Completion of Income Tax Return
Once income records have been checked, and deductions gathered and properly listed the return can be completed like any other tax return by following the instructions on the forms. Be certain to double-check all calculations. The popular tax preparation software programs can be very valuable. They will calculate the tax related to excess investment income (kiddie tax) as well as the Qualified Performing Artist deduction (QPA).
The filing date for 2015 returns is April 18, 2016. The IRS has advised that paper filers carefully check the address to mail their return to as there may be a change from previous years.
Performing Artists Tax Deductible Expense List