Anyone with income over the requisite amount must pay federal income taxes. Most states also impose an income tax, and in some cases there are local income taxes as well. There are basically two types of income:

• Earned Income: This comes from employment and can take the form of wages, salary, tips, commissions and bonuses. Earned income may be subject to both income and payroll taxes.
• Unearned Income: This comes from sources other than employment, such as dividends, interest, capital gains or U.S. savings bonds. If your teen has a bank or brokerage account that earns interest, or a stock that pays dividends, he or she will receive an IRS Form 1099 each year. Most unearned income is subject to income taxes.

 

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.