OP: I'm…ummm…a few years over 18
and have pretty much the same dilemma these days.
The first thing you have to decide is whether you WANT to be in the business of photography. If that's something you want to pursue, then I'd suggest you do RIGHT from the beginning--do your research, get a license AND insurance, and LEARN what is going to be required of you at tax time. There are a lot of resources that can help with that; others have listed some good links.
Or, like me, you may decide, you just want to DO photography. I want to be as GOOD as a "professional" (yeah, yeah, I know, "what's a pro?" Well, this is MY response, MY definition of pro, lol--and that means someone highly skilled), but at least right now, I do NOT want the hassle of running a business. The cons, for me, currently outweigh the pros of setting up a business. To be honest, that stance may change for me in the coming year or so, depending on how some things work out. But for now, I'm still good with being an amateur who produces quality work (well, I'm still aiming for that last part, but I've got the amateur part nailed).
To date, my approach has been to simply not take payment for "jobs" I do. Should the "client" insist--and yes, they so often DO--here's what I do:
1. I explain to them WHY I don't charge. I simply tell them what we're discussing here: "If I charge you, I become a professional. That means I gotta pay taxes on what I make. And get a license. And insurance. And backup equipment. Then I gotta do bookkeeping, and marketing. And that sounds like less fun than having all my teeth ripped out with a screwdriver, so how about you just let me have fun and take photos for you?"
2. If #1 doesn't work, then I suggest a barter. How about I take these photos for you, and YOU…give me a free meal, provide free admission to an event, etc.--whatever is appropriate for both you and the client.
3. If they STILL insist on paying you, take as little as possible. When you end up taking that money, then yes, you're faced with the dilemma "do I pay taxes on this?"
Well, legally, YES, you do. Whether you REPORT it or not is the decision you have to make. Honestly, if it's cash, and less than $500 or so, the CHANCES are that nobody is ever, ever going to know or care. How big a risk taker are you?
Me, I like my integrity. So, if I make money, I report it. So far, I've not made enough in a year to amount to anything, and so I've been able to simply report it in "miscellaneous income." I'm not sure what the upper limit of that is--I just know that every year, I ask "my accountant" (haha, I just like to SAY that! "MY accountant." Okay, I ask this friend of mine who is an accountant, but whom I do not pay for services…) whether the amount I made can be reported there and he says yes.
Talk about nitpicky... but at least we were accountable for all the funding etc. All it took was a bunch of nincompoops from a different agency to be lax about their mileage reimbursement, then decide to go out golfing when they were supposed to be working - and then to have a TV crew following them around. 
Seems like it's always a handful of nitwits that mess things up and that's what we hear about, while most people are doing their jobs.
Once you start making a lot more money or get into weddings (or just jobs that are super lucrative) I'd make your business a little more official but for now just do it under the table!
I may have a chance.
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