Tracking Side Income and Expenses

Cash work leaves no paper trail unless you make one. That sounds like paperwork; it is actually the difference between paying tax on money you never kept and paying tax on what you actually earned — and between being able to fund a Roth IRA and not.

Why a Teen Needs a Ledger at All

A teenager with a W-2 job has an employer doing the record-keeping: hours tracked, taxes withheld, a form mailed in January. A teenager mowing lawns or reselling sneakers has none of that. Every dollar arrives untracked, and by the following April nobody — not the teen, not the parent, not the IRS — has any idea what the year actually looked like.

That matters for three reasons, in ascending order of importance. It decides whether a return is required. It decides how much self-employment tax is owed, because tax is charged on profit and profit means income minus expenses. And it is the only proof of earned income, which is the key that unlocks a custodial Roth IRA. No records, no Roth — the money was earned, but nobody can demonstrate it.

What to Write Down

Four columns, filled in the day the money moves. Anything more elaborate gets abandoned by July.

• Date — when you were paid, not when you did the work.
• Who paid you — a name is enough. It is what makes the entry verifiable later.
• What you did — “mow + trim,” “babysitting, 4 hrs,” “sold jacket.”
• Amount — what actually landed, cash or transfer.

The mirror image on the expense side: date, what you bought, what it was for, and the amount. The “what it was for” column looks redundant until a year later, when “$24.50, hardware store” means nothing and “mower blade, replaced the dull one” means a deduction you can defend.

Payment apps are not a substitute. Venmo and Cash App histories mix your birthday money, your half of a pizza, and your lawn income into one undifferentiated stream, and they do not record a single expense. Use them to get paid; use the ledger to know what it meant.

What Counts as an Expense

The test is whether the cost was ordinary and necessary for the work — normal for that line of business, and genuinely helpful in doing it. For a teen that usually means:

• Supplies and materials consumed doing the job — fuel, trimmer line, mower blades, oil, craft supplies, packaging.
• Inventory — what you paid for the items you resold.
• Fees — selling commissions, payment-processing fees, shipping postage you covered.
• Getting customers — flyers, printing, a yard sign.
• Certifications the work requires — a babysitting course, a CPR card, a food-handler permit.
• Equipment — a mower or a printer, though larger purchases may need to be spread over several years rather than deducted at once. That is the one item worth asking a parent or a CPA about.

What does not count: your phone and clothes you would own anyway, the gas to drive yourself to a job you were going to drive to regardless, and anything you bought for fun and are now describing as business. Personal spending does not become deductible by being adjacent to work.

Worked Example: Marcus, 15, Lawn Care

Marcus mowed for four neighbors from May through August and collected $705. That is the number he would have remembered, and it is wrong in both directions — too high to be his real income, too low to describe what he earned.

His expenses came to $218.08: gas roughly every other week, a replacement blade, trimmer line, oil and an air filter, work gloves, contractor bags, and $18 of printed door hangers that won him a new customer in July. Net earnings: $486.92.

Two lessons live in that table. Without the expense column Marcus would have paid self-employment tax on $705 instead of $486.92 — about $31 of tax he did not owe, on money he never had. And the equipment ate almost a third of his revenue, which is the single most useful thing a fifteen-year-old can learn about running anything: revenue is not income.

Worked Example: Ava, 16, Babysitting and Resale

Ava ran two small businesses at once, which is why her ledger looks different. Babysitting brought in steady evening money with almost no costs. Reselling clothes online brought in less per hour and carried real expenses: the inventory she bought at thrift stores, poly mailers and label paper, platform commissions, and postage buyers did not cover.

She collected $1,006 and spent $311.28, netting $694.72. Her two largest expenses came before she earned a dollar — an $85 Red Cross babysitting course and a $35 CPR card, taken in April specifically because certified sitters charge more. That is a business investment, it is deductible, and it is invisible unless someone wrote it down four months before the first paycheck.

Run the two side by side and the useful comparison appears. Marcus and Ava both lost about 31% of gross to expenses, but for completely different reasons — his were recurring and unavoidable, hers were front-loaded and strategic. Ava’s babysitting hours were nearly pure profit; her resale hours were not. A ledger is what makes that visible, and seeing it is what lets a teenager decide where to spend next summer.

The $400 Line

Here is the rule that surprises families: $400 of net self-employment earnings triggers a required tax return.[1] Not $16,100 — that is the standard-deduction figure that applies to W-2 wages. A teen who earns $5,000 at a grocery store owes no federal income tax and need not file. A teen who nets $500 mowing lawns must file, and owes self-employment tax on it.

The reason is structural rather than punitive. At a W-2 job the employer pays half of your Social Security and Medicare contribution. Working for yourself, you are both the employee and the employer, so you owe both halves — 15.3% of net earnings, calculated on 92.35% of the number.[1] Both Marcus and Ava crossed the line. Neither owed a cent of income tax.

Which is why the ledger’s set-aside row matters more than any other. Move 30% of every payment into a separate savings account the day it arrives. It is more than the tax will be, the surplus is a pleasant surprise in April, and a teenager who has already spent the tax money is learning a lesson that costs real money to learn twice.

The Real Payoff: Roth IRA Room

Everything above is compliance. This part is the reason to bother.

Earned income — including self-employment income — creates Roth IRA contribution room, up to the annual limit. Marcus’s summer of mowing bought him $486.92 of room; Ava’s bought $694.72. The dollars themselves can come from anywhere: many families run a match, where the teen keeps the cash and a parent or grandparent funds the Roth up to what the teen earned. What cannot come from anywhere is the documentation, and that is the one thing only the teenager can produce.

Put those few hundred dollars into a low-cost total-market or S&P 500 index fund — the same boring core recommended in Building a Portfolio, where expense ratios run from a few hundredths of a percent down to zero — and then leave it alone for fifty years. That is not a rounding error. It is the highest-leverage dollar on this entire site, because nothing else you will ever buy gets that much time to work.

Which is the honest case for the ledger. It is a tax tool for one afternoon a year. It is a Roth-eligibility tool for the rest of a lifetime.

Next: the tax filing mechanics are in W-4, Side-Income and Taxes for Teens, the quarterly and 1099 rules are in Side Income & the Gig Economy, and the whole launch sequence is the Before-18 Checklist.