Money Smart Kids
Set Guidelines for Summer Paychecks
By Janet Bodnar, Editor, Kiplinger's Personal Finance
May 23, 2002
My teenage son is going to be working this summer, and we're arguing about what he should do with the money he makes. He says that because he's earning it, he can spend it on whatever he wants. I think I should have some say-so, because I don't want him to fritter it all away.
I'm with you. As a parent, you actually have a right to more than a say-so in what your son does with his money. Because you're supporting him, you're entitled to at least a portion of his earnings.
I don't recommend that parents hold out their hand for their child's paycheck. But lest your son think there are no demands on his income, you should set some fixed costs. Require him to save as much as half his money for college, for example, or to pay for school expenses next year.
Although your son is old enough to earn money, don't assume he knows how to manage it.
- Enlighten your son about taxes, so he won't be surprised when his paycheck is smaller than expected. Most kids don't realize that Uncle Sam will take a cut of their earnings.
- Minimize withholding. Even if you claim your son as a dependent on your return, he's still permitted one withholding allowance as a single person with one job. He should claim it to put more money in his pocket.
- Plan on filing a tax return. If earnings from a job are your son's only income, he can make up to $4,700 this year without having to file a return. But even if he cuts withholding to the bone, money will still be taken out of his paycheck. To get it back, he'll have to file a tax return. Note: Social security taxes are not refundable.
- Help your son open a checking account. With income of his own, he can get a head start on learning how to keep track of where the money's coming from and where it's going. Assuming your son is younger than 18, you might have to co-sign for the account.
- Encourage him to invest in a Roth IRA. This year he can contribute an amount equal to his earnings or $3,000, whichever is less. It's unrealistic to think he'd put aside all his earnings for retirement. But even a contribution of a few hundred dollars will give him a jump on long-term compounding. And, if necessary, he can withdraw his Roth contributions, tax- and penalty-free, to help pay college bills.