The first question that needs to be answered usually is whether or not your child even has to file taxes this year. The answer is this: A child who earns more than $5,350 as an employee (that is, as reported on W-2s) and whose parents claim him as a dependent must file. If that child claims himself as a dependent, he must file if he earns more than $8,750 in W-2 income. If, however, the child works as an independent contractor, he must file (because of self-employment taxes) if he earns more than $400.
Children who earn less than the above are not required to file, but often should because they can get all withheld income taxes refunded.
If your child earns money and chooses to file a return, he files separately from you. The parent can decide whether to claim a child actor as a dependent or to allow the child to claim himself. In basic terms, this decision should be based on income levels. If the child earns more than the combined income of the parents, it is more to the family’s advantage to let the child claim himself. Otherwise, it benefits the parents to claim him. Be advised however, dependency issues are highly complex, and can have legal ramifications beyond tax matters. So before a child claims himself, it is prudent to consult with your tax and/or legal advisor.
Many parents wonder if their taxes will be affected because they have a working child. This is rarely the case as the parents cannot claim expenses they accrue for the child, except under highly unusual circumstances.
Maximize Your Deductions
I’m often asked “What is the one most important piece of advice you can give to actors,” and the answer is simple: keep excellent records and receipts. Doing so will help you maximize your deductions, lower your taxes, and satisfy the IRS if you should get audited.
The record-keeping can be done in a variety of ways, but one thing is essential – it has to be regular. I believe once a week works well for recording your child’s and your own expenditures. You can use a ledger, a computerized spread sheet or a program such as Holdon Log’s, ActorTrack 2.0 – the choice is yours.
You also need some way to make notations in the car. Otherwise, you will forget how many miles were driven and who and what amount you paid for parking. Of course, a minor who doesn’t own a vehicle can’t take mileage on her own – but she can pay you the mileage cost of driving her as a local transportation expense. This year, the IRA is permitting a mileage rate of fifty and a half cents a mile.
Bear in mind that the IRS does not require written receipts for individual expenditures under $75, so long as you have made a written notation of the expense in a business diary or log (which can be any of the devices listed above or even your weekly or monthly calendar).
Find a good way to keep the receipts accessible and in order. An accordion style file with multiple slots works wonderfully – just label each slot with the category of the expense, such as “Acting Lessons” or “Office Supplies,” then group expenses from each category in each slot with the oldest in the front and the newest in the back.
Also remember that a lot of bad advice is given by good people – people who mean well, but don’t really know their subject. We find this particularly true in tax issues. Here’s one myth we commonly hear: all an actor’s clothing is deductible. Sorry — just not true. The tax law is very clear: to be deductible, clothing must not be suitable for street wear. So you are limited to genuine costumes: clown outfits, cowboy suits, period pieces, formal wear and other similar articles of clothing.