Can a Child Earn Money and Still Qualify for Benefits as a Dependent?

Everyone who makes an income must pay tax on that income, no matter what their age, and that includes children. Although, children who are dependents only have to pay federal income taxes if they earn a certain amount.

IRS tax law says that children or dependents are required to file and pay a tax return if they earn more than a certain amount. Your child can earn money from babysitting, which has no minimum age limit except for in Maryland, where the requirement is 13 years. If your child earned a certain amount from competitions like a gaming tournament, sporting event or singing competition, they must file a tax return then, too.

Helping your children file their first income tax return is usually the only way they will learn this essential task in life, as it's not a part of the curriculum in most schools. This could be considered a failure of the education system because many first-time taxpayers have serious problems understanding IRS rules and regulations, which can lead to financial difficulties such as penalties in the future.

With all of this in mind, an understanding of when to pay taxes on your child’s income and the process of claiming them as a dependent can be beneficial for both you and your children.

Who’s a dependent?

A dependent is someone who relies on your income for day-to-day expenses like food, housing, travel and necessities like clothing. The IRS has a list of qualifications for a child to be considered a dependent.

1. Relationship: The child must be your daughter, son, foster child, grandchild, step child or descendant. This could be a nephew or niece, brother, sister, half-brother, half-sister, stepbrother or stepsister.
2. Residence: To satisfy this requirement, you and the dependent must have lived together for at least half the year. Though there are some exceptions, like if the child passed away or was kidnapped. Other circumstances include illness or going away for education, vacation or detention in a juvenile facility.
3. Age: The age of the qualifying child must be less than 19 years before the year's end and younger than you or your spouse when filing jointly. A qualifying dependent can also be a student under 24 years old at the end of the year and should be younger than you or your spouse when filing jointly. An exception is made for disable children, who can be of any age regardless of the time of the year.
4. Joint return: This means your child must not have filed a tax return of their own for the year.
5. Support: Your dependent must not have provided more than half of their own support for the year.

Can I claim a dependent?

If you have a child who satisfies the above tests from the IRS, then you can claim them as a dependent and claim certain tax credits and deductions! The IRS wants to ensure that you are paying the tax amount indicated by the income tax brackets they determine.  

If your dependent is making an income of its own, it can be considered part of your income. Claiming a dependent on taxes is almost always a good idea because you can involve your children in the activity and give them a valuable rundown of how the tax system works.

Who can I claim as a dependent?

You can claim several relatives as defined in the relationships above, and you can claim their descendants such as a grandchild, a nephew or a niece.

Naturally, the IRS allows you to claim an adopted child as a dependent if they satisfy the requirements.

Do dependents file taxes?

The IRS always encourages you to file a tax return, even if you don’t owe any taxes because it benefits them to have as much information about a potential taxpayer as possible. For example, when you file taxes for a dependent child or claim a child tax credit, you have to provide information like the Social Security Number (SSN) of the dependent, which helps the IRS identify a taxpayer.

There are a lot of tax benefits when you declare dependents. These benefits come in the form of education tax credit and dependent care credit. These tax credits directly lower your tax amount and you also get a refund if your credit amount is more than your tax amount.

For a dependent to pay taxes separately from their parent or guardian, they must earn at least $12,550 throughout the tax year. For a child to be considered a dependent, their gross income must be less than $4,300 throughout the year.

Let’s say your child has occasional acting jobs in television commercials, and her income was more than $12,550 last year. Your child would have to file their own tax return and pay taxes on that income if they owe any after deductions. If she was working for a film production house, her taxes would be directly withheld from her income by that company.

Filing taxes as a dependent is a good exercise for your child because, sooner or later, they’ll have to do their taxes on their own. To help make the tax filing process easier, you can use cutting-edge tax tools like FlyFin. It uses A.I. to automatically find all your tax deductions and provide you with 24/7 tax CPA support.