College Students: 4 Types Of Income You May Be Taxed On
By Nick Parkhouse | For StudentAdvisor.com
Don’t assume that just because you’re a student, you don’t have to pay tax on your earnings. Despite the “perpetually broke” stereotype, there are still plenty of college students out there that earn money from part-time jobs or their savings.
While many students don’t earn enough to pay federal income tax, you should still pay attention to your tax return. If you’re a student, keep reading to learn about four types of income you can earn on which you may pay tax. You’ll also find out how to get help with preparing your tax return.
1. Wages, Salary and Tips
Everything you receive as payment for your services should be reported as income. This includes wages, salaries and tips. If you receive tips of $20 or more in any one calendar month while working for one employer you are obliged to report the total amount of tips to your employer by the 10th day of the following month. To do this, you use Form 4070, ‘Employee’s Report of Tips to Employer’.
The amount of wages (including tips) or salaries you received during the year is shown in box 1 of your Form W-2, Wage and Tax Statement. Your employer will give you Form W-2 soon after the end of the year.
2. Investment Income
Some income that you may receive from savings and investments is taxable. For example, interest you get from checking and savings accounts and most other sources is taxable. This includes so-called “dividends” on deposits from credit unions, savings and loan associations or mutual savings banks. It also includes distributions of money, stock, or other property paid to you by a corporation (such as stock dividends).
Whoever pays you your interest will send you a statement if you earned at least $10 in interest for the year. You should receive these statements sometime in January for the previous tax year.
Interest on U.S. Treasury bills, notes, and bonds is taxable for federal income tax purposes as is interest on U.S. savings bonds. However, these interest payments are both exempt from state and local income taxes.
3. Self-employment Income
Any earnings you generate through self-employment are subject to income tax. Keep in mind though that you’re taxed on your net earnings; namely your income minus any allowable business expenses. You are responsible for keeping records of your income and expenses and you report these every year.
If your net earnings are over $400 you will also have to pay self-employment tax. This pays for your benefits under the social security system.
4. Certain Scholarships and Fellowships
The IRS states that, “if you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.”
If you are a degree candidate, you can generally exclude the following from your income:
- The cost of fees, books and equipment required for your courses
- The money used for tuition and fees required for enrollment or attendance
- Any income you receive from a grant, which goes toward your living
expenses cannot be excluded from your income.
Getting help with your taxes.
Many colleges and universities participate in the Volunteer Income Tax Assistance (VITA) program, which is designed to help students by offering free tax preparation. Ramon Fernandez, assistant professor of accounting at the University of St. Thomas in Houston helps run their VITA scheme and says: “College students have fairly simple tax returns. They normally don’t earn enough money to pay taxes or to itemize, but they may have withholdings refunded. A lot of college students can’t afford to pay $200 to have their taxes prepared, so they should take advantage of free services like VITA.”
Nick Parkhouse writes for taxbrackets.org and graduated with his Bachelor of Politics degree in 1995. He has worked in finance and tax for over fifteen years. Connect with Nick at Tax Brackets or on Twitter @nickparkhouse.