Young Entrepreneurs and Taxes

Whether it’s a lemonade stand, a lawn-mowing business or an early investment into the stock market, teens and young adults who are self-employed may have tax responsibilities. Read on for a quick overview on young entrepreneurs and taxes—including who needs to file, how to prepare, and how much to expect to pay. As always, we suggest contacting a tax professional for details on your specific situation and visiting irs.gov for all tax information.

When Do Young People Need to Pay Taxes?

Anyone who is self-employed and earns $400 or more must file a tax return; including minors. There’s no minimum age for filing and signing a tax return, so any young entrepreneur can and should do a return. Plus, going through the process is a great way for young adults to start learning the ins and outs of financial management and how to file taxes.

Can Parents File a Return on Their Child’s Behalf?

When filing a tax return, parents of a dependent who is self-employed can’t claim the dependent’s earnings as part of their own overall income. A return must be filed individually, by the earner. However, parents can certainly help their enterprising children to get ahold of the right forms and get everything filled out!

How Can Young Entrepreneurs Prepare for Taxes?

Teens and young adults running their own venture should prepare for taxes by keeping careful records of the business. This means recording sales and receipts, as well as business-related expenses. Money spent growing the business—for example, purchasing lawn mowers for a landscaping venture—can be claimed as deductible expenses on a tax return. Another way to prepare is to start saving money towards a potential tax bill, should they need to pay taxes.

What Will a Young Entrepreneur Need to Pay?

The amount of tax owed by a young adult depends on how much money they earned. In many cases, young entrepreneurs who apply the standard deduction (which was $12,550 in 2022 for single filers) won’t have any taxable income and therefore won’t owe any money in taxes. Even if money isn’t owed, it’s still important to file a tax return.

How Does Other Work Affect Teens’ Tax Filing?

When a young entrepreneur is doing other work alongside their own venture, it’s even more important to file a tax return. Teens with a traditional after-school or summer job may have already noticed that a portion of their paycheck is held back, deducted, each month, to cover taxes. Filing a tax return ensures that some of these tax deductions will return to the earner, in the form of a tax refund Whether tax deductions will be refunded will depend on the young adults tax liability; some may have all, some or none of their tax deductions returned based off their individual tax situation.

Do Stock Investments Count as Earnings?

If the young person in question is earning money via investments in stocks, mutual funds, and other financial assets, they will need to pay capital gains taxes just like an adult. The specific amount to be paid depends on their income bracket, and how long they held onto the stock before selling.

Short-term capital gains (which apply to investments held for less than one year) are taxed at the same rate as the stockholder’s income bracket. Long-term capital gains (on investments held for more than one year) are taxed at a rate of 0-20%, depending on the stockholder’s total taxable income.

On the other hand, if the young entrepreneur has purchased a financial asset but not sold it, no taxes are owned on this investment. Taxes won’t be owed until the asset is sold, at which point the stockholder’s current income and filing status will determine how much tax is owed. You can read more about tax considerations when investing on our previous blog.

Where Can I Learn More?

The IRS website is the source of all tax information. Visit irs.gov to learn more about tax considerations when investing. You may also contact a tax professional who can provide information on your specific situation. The information in this article is intended for general educational purpose and is not tax advice.