For many teenagers, having a job and the ability to earn their own money is a rite of passage. With it comes a certain amount of freedom to make decisions regarding spending and saving. It's also an opportunity to start building positive behaviors and a life-long attitude towards managing money.
While starting that first job is often a bit scary, getting the first paycheck can be one of the most anticipated moments in a young person's life. The acclaimed book, Yes, You Can... Raise Financially Aware Kids, shares with parents how to prepare their children for what might be a shock when they receive their first paycheck. Especially if they are looking forward to taking home all the money they've calculated they should have earned based on the hours they worked.
Before the first pay day arrives, talk to your teenager about the difference between gross pay (what they earn before taxes and other deductions) and net pay (what they will actually receive) and explain how these deductions are used:
- Federal withholding - supports federal programs and is paid to the IRS;
- FICA - (Federal Insurance Contributions Act) supports the Social Security System, which provides money to senior citizens, dependant survivors and the disabled;
- Medicare - supports the hospital insurance provided under Social Security;
- State withholding - supports state programs and is paid to the state revenue department;
- Local withholding - supports city and county programs; and,
- Insurance and benefits (if applicable) - includes such items as health/dental/disability insurance, retirement accounts and miscellaneous deductions.
As of September, 2010, the deductions for Social Security and Medicare are 6.2 percent and 1.45 percent, respectively, per pay period. Federal withholding is based on total earnings, how often you get paid each month and the number of personal deductions taken. State and local withholding varies, depending on specific state and city assessments. Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - do not impose a tax on income.
It is important for first-time workers to understand that while it may be frustrating to see money withheld from their check while they are young, the purpose of the FICA deductions is to benefit them when they reach retirement age. And, income taxes are a responsibility shared by all wage-earners to fund programs and services at the federal, state and local levels.