How Do Taxes Work?

How Do Taxes Work?

Teens are usually surprised to see how taxes impact their paycheck. Your kid might have questions about different amounts taken out of their total pay. Parents know they need to pay taxes out of their paycheck at the end of each year, but many aren’t prepared to answer kids who ask, “How do taxes work?” Start with the basics and help kids understand how taxes impact their life.

What are taxes?

Taxes are payments required by the government and deducted from your income by an employer or self-paid. Individuals and companies pay taxes to the government on income, profits, and other money categories. There are many different types of taxes charged at different times and rates.

How do taxes work and why do we pay them?

Taxes contribute to public services and keep our communities functioning. Different taxes may pay for projects like repairing roads or paying for public education. Your taxes can vary depending on where you live and what your local government decides. Common taxes include income, social security, sales, and property taxes. Your child may be surprised to know they often pay taxes, too, when they swipe a kids debit card or buy a new toy.

Income taxes

Income taxes are calculated in different brackets depending on how much money you make throughout the year. Everybody pays the same rate on the first bracket, but whatever income amount goes over the first bracket income limit is taxed at the second bracket rate and so on.

How do federal income taxes work?

Everybody who lives and works in the United States is subject to federal income tax since this tax is charged nationwide. Income tax keeps our country’s government working and generally acts as a pool of money used for different projects, defense, and government programs across our nation. Government payments and tax credits are handled at the federal level.

How do state income taxes work?

While everyone pays federal income tax, state income tax depends on where you live. Income tax rates can vary from state to state, and some states, like Florida, have no income tax at all.

Social security tax

Social security tax is a mandatory tax paid to the federal government from your paycheck. It pays for government social security programs, like retirement payments to the elderly.

Unemployment tax 

If you lose your job or get laid off, you can collect money from a government program while you get back on your feet, thanks to the unemployment tax. Taxes are deducted directly from your paycheck and make you eligible to collect payments if you face future unemployment.

 

Taxes are difficult for most parents to discuss with teens entering the workforce. Keep language simple and help your child understand the different taxes they pay out of a paycheck or when they swipe a kids debit card at the store.


Share your experience teaching kids about taxes by tagging @gohenry with #letstalkmoney on Twitter or Facebook.

 

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Written by Kristin Yarbrough Published Jul 29, 2022 ● 3 min. read