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Most teens will be earning an hourly wage at their first summer job, and they might expect that by multiplying the number of hours they work by their wage, they’re calculating the total amount that will show up on their check.
But they may be in for a not-so-sweet surprise when they open up their first paycheck to discover that a chunk of that total is missing. That’s why it’s important for teens to understand what tax withholding is, what they qualify for and where those deductions are documented before they get their first paycheck.
So, What Is Tax Withholding?
Tax withholding is that chunk of money taken out of each and every paycheck. Teens should understand where that money goes and what it’s being used for. The tax deductibles can be broken down into four parts:
What Do Teens Have to Pay?
Two payments every teen is required to make no matter the size of income are Social Security and Medicare. These will always be taken out of their paychecks. Things get a little trickier when it comes to determining whether your teen will owe federal or state taxes.
Teens earning less than $6,300 over the course of the year may claim an exemption from income tax withholding by giving the employer a new Form W-4, and won’t have to pay those taxes. However, if your teen has unearned income (interest or dividend income, for example) that threshold is much lower. Also, if income taxes have been withheld from a teen’s paycheck, that teen will need to file a tax return to get a refund. Sitting down with your teen and calculating their projected annual income will allow you both to learn whether federal taxes must also be taken into account.
Unlike federal taxes, state taxes can vary depending upon where you live. Each state can create its own tax law and have its own requirements. Check your local laws with your teen and again see if they are likely to owe state taxes.
Where Do I Find Tax Withholdings?
Now that your teens understand what tax withholdings are and if they are likely to owe taxes, they need to know where tax withholdings are documented and where they can keep track of them. This can be found on their paycheck.
These days, most companies use direct deposit so the earned income is sent directly to bank accounts, as opposed to a physical paycheck that must then be deposited at a bank. Teens must find out which form of payment their company will be using and plan accordingly. Employees using direct deposit will still have access to a paystub, even if they do not receive a paper check.
Regardless of whether they receive a paycheck or paystub, the document will contain:
Understanding these concepts and knowing how to read a paycheck will help your teen understand their financial standings and catch any mistakes that could cause them to lose out on potential income.