As teenagers are taking part-time and summer jobs to earn some spending cash and help with saving for college, now is a great time to start instilling some money management skills. Here are some details about paystubs that you can teach your teen as he or she enters the working world.
Fundamentals of paychecks
Whenever you start a new job, you will need to give your employer a signed Form W-4. This tells an employer how much IRS and state income tax withholding you want deducted from your paycheck. If your child expects his or her total wages for the year to be under $5,950, have him or her write “EXEMPT” on line 7. If not, enter 1 on line 5.
People often think that children and students are automatically exempt from taxes. Nope. Nor are there special allowances or deductions for working children. They are subject to all the same payroll taxes as adults, although children under age 18 are exempt from withholding for Social Security and Medicare when working for a parent’s business (not a partnership or corporation).
What kind of deductions can your teen expect from a regular paycheck—and where does the money go?
IRS or federal deductions
- SS = Social Security: For 2012, 4.2 percent (a temporary reduction from the usual 6.2 percent) up to wages of $110,100. This deduction gets recorded in your Social Security account, which will pay you benefits when you retire or if you become permanently disabled.
- Medi = Medicare: 1.45 percent on all wages. This goes toward your Medicare coverage when you turn age 65 or if you become permanently disabled.
- FWT or FIT = Federal Income Tax Withheld: This amount will depend on the exemptions you list on your Form W-4. This pays your federal income taxes. When you file your tax return, you might get part of this back as a refund.
- SIT = State Income Tax Withheld: This amount will depend on the exemptions you list on your Form W-4. This deduction pays your state income taxes. When you file your tax return, you might get part of this back as a refund.
- SDI or DI = State Disability Insurance: Most states have an amount you pay toward a fund. If you get hurt and are unable to work, you will get disability income when you file a claim.
- Other: Sometimes states have other charges and deductions. There might also be a city tax in certain states.
- Union dues: This deduction goes toward your union membership. It may provide medical benefits, retirement funds and more—or it may offer nothing of value. Find out if you can opt out of the union if you will only be working at the place of business for a short time.
- Reimbursements: Some jobs require you to pay for your tools or supplies.
- Health insurance: If a working child can be covered by his or her parents’ insurance plan, the child may be able to opt out of this deduction.
- Retirement plan: If your teen is going to work for the same company summer after summer, he or she might want to consider participating in a retirement plan.
Deductions you should not see
- Workers compensation: Some employers try to pass this on to workers. Generally, it’s illegal to do so.
- FUTA = Federal Unemployment taxes: The employer should be paying this, too.
In general, teach your teens to be curious. When they are hired, have them ask to see what a normal paycheck stub looks like and have the employer explain the items on it. When they start getting paid, be sure they look at their paystub. If there is anything they don’t understand, make sure they ask their employer about it immediately.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.