Lana Oconnell
University students often work part-time or freelance jobs and may be classified as employees or independent contractors for tax purposes. Students' income is generally taxed depending on their earnings and the applicable tax brackets. In the UK, for instance, individuals earning over £12,570 (as of 2021) enter a higher tax bracket and pay a basic tax rate on their income. In the US, students may be claimed as dependents on their parents' tax returns, and their parents may be eligible to claim education deductions and credits. Students may also qualify for tax benefits, such as loan interest deductions, credits, and tuition programs, to lower their tax liability.
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What You'll Learn
Tax benefits for students
Students often have special tax benefits available to them. These vary depending on location and individual circumstances, but some general benefits for students include:
Tax Credits
Students may be eligible for tax credits, which lower the tax bill by the value of the credit. Examples include the American Opportunity Credit, which is available for expenses such as tuition and course materials during the first four years of college. The maximum credit is $2,500 per year for single filers with a modified adjusted gross income (MAGI) of up to $80,000, and $160,000 for married joint filers. The credit is partially refundable, so even if no taxes are owed, up to 40% of the credit (or $1,000) can be claimed as a refund. The Lifetime Learning Credit is another example, which is worth up to $2,000 for qualified education expenses.
Deductions
Deductions reduce the amount of income that is subject to tax. Students may be eligible for deductions on loan interest, scholarships, fellowships, and education grants. For example, in the US, scholarships and grants are typically tax-free, but there may be situations where they are counted as taxable income.
Free Filing
In some cases, students and recent graduates may be able to file their taxes for free. This is dependent on factors such as gross income and whether parents can claim the student as a dependent.
Thresholds
In some countries, students are only taxed once they earn over a certain threshold. For example, in the UK, the minimum wage to pay tax was £12,570 as of 2021. Students with part-time jobs are unlikely to reach this threshold and therefore won't be taxed.
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Student income tax thresholds
Students have special tax situations and benefits. For instance, scholarships and grants are typically tax-free, but there may be situations where you have to include them in taxable income. If you're filing a tax return, you may need to include scholarships and grants as taxable income.
In the US, if you're classified as an employee, your employer will automatically withhold your money and send it to the IRS. However, if you're classified as an independent contractor, you're responsible for reporting taxes yourself and sending in either quarterly estimated tax payments or an annual tax payment. You will receive a W-2 if you work for an employer, whereas you'll receive a 1099 from each company if you're an independent contractor.
In the UK, the minimum earning wage to pay tax was £12,570 as of 2021. If you earn over this bracket, you will have to pay a basic tax rate on everything you earn over that amount. However, if you are working a part-time job while studying at university, you will likely not be taxed as you are unlikely to meet the required earning bracket.
In New Zealand, from 31 July 2024, some Student Allowance after-tax rates will increase by up to $2.16 a week.
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Student tax exemptions
Students have special tax situations and benefits. While there is no exemption from tax for full-time students, if their income is below the filing requirement for their age, filing status, and dependency status, they will not owe income tax and will not have to file a tax return. Students who are claimed as dependents on their parents' tax returns are generally not eligible to claim education credits. In this case, the student's parents may be eligible to claim these deductions.
Students who have had tax withheld that they would like refunded to them may choose to file a tax return. Students who are employed may be treated as independent contractors, in which case they are responsible for reporting their own taxes and sending in quarterly estimated tax payments or an annual tax payment. Students can use Form W-4 to claim exemption from withholding. To be exempt from FICA taxes for the entire summer semester, a student employee must be enrolled in at least four credit hours in summer C, or at least four credit hours in summer A and four credit hours in summer B.
Students can also take advantage of tax benefits for higher education, such as loan interest deductions, credits, and tuition programs, which may help lower the tax they owe. Scholarships and grants are typically tax-free, but there may be situations where they must be included in taxable income. Students should keep an eye out for the 1098-E Student Loan Interest Statement and the 1098-T Tuition Statement, which will be necessary for student loan interest deductions.
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Student tax credits and deductions
Students have special tax situations and benefits. For instance, scholarships and grants are typically tax-free, but there may be situations where you have to include them in taxable income.
If you have student loans or pay for your education, you may be eligible to claim education deductions and credits on your tax return, such as loan interest deductions, qualified tuition programs (529 plans), and Coverdell Education Savings Accounts. Students who are dependents on their parents' tax returns aren't generally eligible to claim these education credits, but their parents may be able to claim these deductions and credits.
In the US, the American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining credit (up to $1,000) refunded to you.
To be eligible for the AOTC, you must meet all of the following requirements:
- You, your dependent, or a third party pays qualified education expenses for higher education.
- An eligible student must be enrolled at an eligible educational institution. The eligible student is yourself, your spouse, or a dependent you list on your tax return.
- You, your spouse (if filing jointly), and the qualifying student must have a valid taxpayer identification number (TIN) issued or applied for on or before the due date of the return.
Additionally, it's important to understand the tax reporting requirements for your work arrangement. If you're an employee, your employer will withhold income tax, Social Security, and Medicare from your wages and send this to the IRS. However, if you're an independent contractor, you're responsible for reporting and paying taxes yourself, either through quarterly estimated tax payments or an annual tax payment.
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Student tax documents
Students have special tax situations and benefits. If you're a student, you may need to file a tax return depending on your gross income and whether your parents can claim you as a dependent.
If you're filing a tax return, you may need to include scholarships and grants as taxable income. However, scholarships and grants are typically tax-free. You can use the Interactive Tax Assistant to find out if you need to include your scholarship, fellowship, or education grant as income on your tax return.
If you have student loans or pay for your education yourself, you may be eligible to claim education deductions and credits on your tax return, such as loan interest deductions, qualified tuition programs (529 plans), and Coverdell Education Savings Accounts. If you made federal student loan payments in 2022, you may be eligible to deduct a portion of the interest you paid on your 2022 tax return. The 1098-E is a Student Loan Interest Statement form that shows how much interest you paid on your student loan during the year. The 1098-T Tuition Statement form reports tuition expenses that might entitle you to an adjustment to income or a tax credit. Schools must send Form 1098-T to any student who paid "qualified educational expenses" in the preceding year. Qualified expenses include tuition, any fees required for enrollment, and course materials required for enrollment.
If you work for an employer, you'll receive a W-2 form. If you're an independent contractor, you'll receive a 1099 form from each company. As an employee, your employer will automatically withhold your money and send it to the IRS. However, as an independent contractor, you're responsible for reporting taxes yourself and sending in quarterly estimated tax payments or an annual tax payment.
Additionally, the IRS has partnered with the Department of Education (ED) to simplify the online process of applying for Free Application for Federal Student Aid (FAFSA) and Income-Driven Repayment (IDR) plans. ED will release tax data directly to the college or career school's financial aid office listed by the student on the application.
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Frequently asked questions
It depends on the country and the student's income. In the UK, for instance, the minimum wage to pay tax was £12,570 as of 2021. In the US, students might qualify to file their taxes for free, but they still have to pay income tax.
University students can benefit from tax deductions and tax credits. In the US, for example, students can claim up to $2,500 of qualified college expenses for their first four years of post-secondary education. They can also claim deductions on loan interest.
Yes, university students working part-time or freelance jobs are subject to income tax. If classified as an employee, the employer withholds income tax, Social Security, and Medicare from wages paid. If classified as an independent contractor, the student is responsible for reporting taxes themselves and sending in quarterly estimated tax payments or an annual tax payment.
