First Person: Students, Summer Jobs and Taxes

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If you are a student, then the two-month hiatus from school over the summer months is a time for relaxation, recreation, and, for some, work. Whether it's lawn mowing or babysitting, a camp counselor or a paid internship, here are three extremely important things that students should be aware of when it comes to their taxes.

Understand how to fill out Form W-4.

Any employer who plans on giving you a W-2 at the end of the year should be asking you to fill out a Form W-4, Employee's Withholding Allowance Certificate, at the outset of your employment. The W-4 tells your employer how much federal tax you want withheld from your pay. Thought should be given to the projected amount of earnings you will have. Although these figures change slightly each year, the IRS has dollar thresholds in place that indicate if you need to file a tax return or not.

For example, for a single person under 65, unless you made more than $9,650 in 2010, you were not required to file. This means that none of your income was subject to federal tax. However, if you did have federal income tax withheld, you should have filed to get all of that withholding back in way of a refund.

With that in mind, if you will only be earning a few thousand or less over the summer months, then you can possibly claim a total exemption from tax. Per the W-4 instructions, write the word exempt on line 7. This will give you more in your pocket.

If you are your parent's dependent, keep in mind the rules are a little different. See the next subheading below.

If you have been working for the majority of the year, or if you plan to stay at this job beyond just the summer, make sure you are following the instructions for how to appropriately complete the W-4. Remember, the higher number you elect, the more exemptions to federal tax you will have.

Even though you may be entitled to a higher exemption amount, you can always elect to claim less tax exemptions. By doing so, you will ensure a tax refund, as opposed to a tax balance.

For assistance in determining how much to have withheld from your pay, use the IRS Tax Withholding Calculator.

You may still be a dependent on your parent's tax return.

Although you are working, if you are under age 19 and still living at home, or under age 24 and are also a full-time student, you likely are still considered a dependent to your parents for tax purposes. This means that your parents will likely claim you on their tax return and take an additional exemption from their taxable income. If your parents can claim you, then the dollar amounts that you can earn before you have to file change. The use of the word can is not an oversight; even if your parents do not claim you, the fact that they legally can makes these rules apply.

For dependents under age 65, if your earned income was for than $5,700, then you must file a tax return. Additionally, if you file, you will not be able to claim your personal exemption to tax, because your parents can. (A personal exemption means you get to deduct a certain amount off of the income you will be taxed on. For 2010, each personal exemption an individual claimed yielded a deduction of $3,650 from their taxable income.)

Based on what you learned about Form W-4, be cautious about claiming a total exemption from tax withholding. If you are losing your personal exemption, you will be required to pay tax on anything over $5,700. This figure may change each tax year.

You may be paid as a self-employed individual.

Prior to starting a new job, find out how you will be paid. Are you an employee or a will you be considered a subcontractor? This is important to know because if you are a contractor or subcontractor, your payer will not withhold anything from your pay for any Federal, state, Social Security or Medicare taxes. The IRS considers a person self-employed if they carry on a trade or business as a sole proprietor, are an independent contractor, or are in business for themselves in any way. Fancy definition, but if you are working for a company as simple as a landscape service for three months, you likely may be paid this way.

Payers who hire seasonal help often pay their workers as contractors. This means they will give you a 1099-MISC form at the end of the year in lieu of a Form W-2. The 1099 will reflect 100 percent of the amount you earned, and you are responsible to pay the tax. No one is withholding any tax for you.

Additionally, the filing requirement for a self-employed person is drastically lower than that of a wage earner. If your net earnings from self-employment were $400 or more, you will need to file. This is because the tax for Social Security and Medicare (commonly known as FICA) kicks in at this low threshold.

You will need to use Schedule SE to report and pay FICA tax. If you have qualified business expenses that you can deduct from your gross earnings, file a Schedule C in conjunction with your Form 1040.

More from this contributor:
Does the IRS consider you an employee or an independent contractor?
What happens if I do not file my tax return?
What income does the IRS consider taxable?