Do I Have to Pay Taxes on Money My Parent Gave Me?
Parents are legally required to provide for financial support for dependent children, but large gifts can have negative tax consequences -- for your parents. In general, you don't have to pay taxes on money you receive from a parent unless you are your parent's employee.
Gift Tax Basics
The gift tax applies to individuals that give large sums of money away over the course of their lives. When someone gives away more than $13,000 in cash or property to a single recipient over the course of a year, the amount that exceeds $13,000 is subtracted from the giver's lifetime "unified credit." According to the Internal Revenue Service, the unified credit is $5,120,000 in 2012. If a giver uses up his entire unified credit, further gifts in excess of the $13,000 limit are subject to gift tax. The gift giver is responsible for paying gift taxes unless the recipient agrees to pay the tax instead. This means you don't have to pay tax on gifts you receive from a parent unless you make a special arrangement to pay gift tax owed.
The purpose of the gift tax is to prevent wealthy individuals from giving away assets to avoid the estate tax. The estate tax applies to the value of assets that exceed a decedent's unused unified credit. In other words, $5,120,000 of a decedent's assets are exempt from estate tax unless he made large gifts while he was alive that ate into his unified credit. If your parent gives you large gifts that reduce his unified credit, it could result in estate taxes on the assets you stand to inherit later.
Gifts Vs. Wages
If your parent gives you money for work you perform in a trade or business, you are your parent's employee. Payments you receive as an employee are considered wages, even if you earn them from a parent. Unlike gifts, wages are subject to federal income taxes. As an employee, your parent is required to withhold a portion of your pay and send it to the Internal Revenue Service to cover your tax liability. Income taxes apply even if you are under the age of 18.
Social Security and Medicare
Depending on how old they are, children employed by parents may owe Social Security and Medicare taxes on their wages. The IRS states that a child under the age of 18 working for a parent's sole proprietorship or a partnership owned solely by the child's parents do not have to pay Social Security or Medicare taxes. Children over 18 and children who work for corporations are subject to Social Security or Medicare taxes.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.