Our family is reaching another milestone this summer – the first paid job by a teen. Daughter #2 has obtained a lifeguarding job at a local pool, and we recently filled out all her new hire paperwork, including the W-4 Employee’s Withholding Allowance Certificate. As we filled it out, there was a discussion of whether she was going to owe any federal income taxes next year, and whether she should just claim exempt and not have taxes withheld.
I said no.
Yes, it is true that she will probably not owe any federal income tax. I did an estimated tax return to make sure we weren’t missing anything, and, unless she works overtime every week, she’s going to get a refund of every cent of taxes that are withheld from her paycheck. So, why would I make her go through the drama of having the government hold a portion of her pay and then having to do an income tax return at the end of the year?
It’s about the process.
As I financial educator, I see lots of grown adults who have absolutely no understanding of how our income tax system works, and, in particular, the part that withholding plays in the process. I can explain it to my kids until I’m blue, and make them read articles about it, but they’ll never understand it quite as clearly as when that first paycheck shows up and a chunk is missing for taxes. Further down the line, a 1040EZ Income Tax Return is a fabulous tool for seeing just how your tax liability is calculated, and how the amount that you’ve had withheld directly impacts whether you will get a refund or owe additional taxes.
While I’m not normally a fan of purposely overwithholding, we’re talking about very small amounts of money, and I think the value of the education is well worth the $.23 interest that she’ll miss. As a bonus, if she does earn enough to owe taxes, she’ll already have paid and won’t be surprised with a tax bill next year.
I can’t imagine a better opportunity to give a real-world lesson in our income tax system, and the opportunity would be lost if she claimed exempt on her withholding certificate. Next spring, I’ll let you know the results of this experiment.
Update: Things worked out pretty much the way I expected. Come tax season, she figured out the 1040EZ all by herself, and then we went over it together. Lesson learned, and she did it all herself the second year. Plus, there was an unexpected bonus lesson that I didn’t anticipate. Receiving a couple of hundred dollars in unbudgeted money gave us an opportunity to talk about evaluating the best use of that money and not just dropping it into your bank account to get frittered away. I’m pleased to report smart choices so far!
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