Unpacking the Paycheck Puzzle
“This is insane! They said I’d make $9 per hour, but they only gave me like $7!” The reaction was heard throughout the house. The mail had come, as had your teen’s first paycheck. And they weren't too pleased. Every nickel allotted weeks in advance of their payday, the slew of unanticipated withholding was not a pleasant surprise. They’re on their way to the kitchen, and you’re about to give teach a miniature course on Adulting 101.
The Wonderful World of Withholding
A typical paycheck has three items withheld: social security, state, and federal taxes. Depending on your state’s tax rate, that can be as much as 20%. Such a hit comes a bit easier when you’re expecting it. This IRS Calculator can help you anticipate what exactly will be withheld from your paycheck before the minus signs arrive in your mailbox. Also, not all withheld wages are gone forever. Assuming your child’s income is typical of a teen, they’ll get a lot of that back after filing their taxes in April.
The Magical Power of (Actually Helpful) Withholding
Not all withholding is a bummer. Proactive teens can invest in their futures through the power of a paycheck hack. Most employers allow for a portion of each paycheck to be deposited directly in a savings or investment account (called “Elective Deductions”). By investing in a Roth IRA, post-tax income is allowed to grow tax-free. For a teen, the decades of potential growth that lie ahead could make for one sweet tax-free payday in their retirement years. And setting up automatic transfer eliminates the temptation to spend it all at the mall.
Watch the Biz Kid$ hosts explain elective deductions here.
FYI’s For Young Entrepreneurs
If tax withholding seems harsh, there’s something worse: not having taxes withheld, only to owe Uncle Sam come April 15. Such can be the life of a budding young entrepreneur. Self-employment comes with added responsibilities, one of which is planning for and filing your own taxes. It also comes with added expense: while an employee is reponsvilbe for only half of their social security taxes, a self-employed person is responsible for both halves. That’s a whopping 15.3%, on top of any state and federal income tax.
Additional Info on Dreaded Subtraction
Want to give your child more resources on the subject? Our free lesson plan will help your child understand their deductions and taxes. Prefer to give your kids a heads up about their paycheck without hearing them groan, “Moooo-ooom”? Send them a link to our episode of the subject, “Understanding Your Paycheck.” We’ll take care of it in a way that’s both informative and entertaining.
Free Lesson Plan: Understanding Your First Paycheck
Students receive a sample earnings statement and break down the different categories of information. Students then break into groups of four and play the 'Paycheck Mystery Word Game'.
What Students Learn:
Why there are deductions on your paycheck
What the deductions are for
What’s the purpose of taxes