Understanding Tax Implications for Minors Starting a Side Hustle: A Guide for Parents in Idaho
Starting a side business can be an exciting and educational experience for young entrepreneurs. If your 12-year-old is eager to earn money through a side hustle such as dropshipping or print-on-demand services, it’s important to understand the associated tax responsibilities to ensure compliance and maximize potential benefits. This guide provides an overview of key considerations for parents in Idaho, United States, to help navigate the tax landscape when minors earn income from their ventures.
- Recognizing Income Earned by Minors
In the United States, minors who earn income through self-employment are subject to federal income tax obligations just like adults. The IRS requires all individuals, regardless of age, to report income exceeding certain thresholds. As of 2023, if your child’s earned income surpasses $12,950, she may need to file a federal tax return. Earnings below this threshold, however, might not necessitate filing, but it’s wise to keep detailed records.
- Filing Requirements and Tax Brackets for Minors
Minors are taxed similarly to adults, but there are nuances. For example, if your child has unearned income (such as interest or dividends), different rules apply. For earned income from her side hustle, she will be taxed at the standard federal income tax rates, which are progressive. Because she is a minor, her income may be taxed at her parents’ tax rates if she is a “kiddie” with unearned income, but earned income from a legitimate side business will typically be taxed according to her own income brackets.
- Self-Employment Taxes and Responsibilities
If your child’s side hustle results in net earnings of $400 or more in a year, she may be responsible for self-employment tax, which covers Social Security and Medicare contributions. This tax applies regardless of age, so it is important to plan accordingly. Typically, in the case of minors earning income from a self-run business, a Schedule C (Profit or Loss from Business) can be filed as part of her federal return.
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Strategies for Tax Efficiency and Saving
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Tax-Advantaged Accounts: While minors can open accounts such as Roth IRAs or college savings plans (529 Plans), contributions often depend on earned income; contributions must not exceed the earned income for the year. Establishing a Roth IRA may be an effective way for your child to start saving for college on a tax-advantaged
