Theme 6: Understanding the IRSLesson 2: Your First Job

Educational Standards

State and National Standards

Time Frame

One to four hours

Curriculum Area(s)

• Civics/Government
• Technology
• Family and Consumer Sciences
• Economics

Purpose

To help students understand that they are responsible for paying income taxes through withholding as they earn income and that it is important that they keep accurate records of their earnings and expenses

Objectives

Students will be able to

• discuss the importance of Form W-4.
• identify ways to keep accurate financial records.

Background

U.S. citizens and residents generally have to pay tax on their earned income based on ability to pay. Federal income tax is collected on a "pay-as-you-go," or "pay-as-you-earn" basis. Employees usually have taxes taken out of, or withheld from, each paycheck that is subject to tax. Some people are exempt from tax withholding.

Employees provide information on Form W-4 so that their employers can determine how much should be withheld from their wages. Employees are expected to complete Form W-4 accurately and honestly.

By January 31 of each year, employers must give employees copies of Form W-2 that show how much employees earned in the previous year and how much was withheld. Employees should check this form for accuracy and attach a copy to their tax returns.Even people who do not owe any taxes should file a return if they had any federal income taxes withheld from their pay. To have withheld taxes refunded, people must file a return.

It is essential to keep accurate financial records after entering the workforce. Two basic systems for recordkeeping are on paper and on a computer.

Key Terms

earned income

This includes wages, salaries, tips, and net earnings from self-employment.

exempt (from withholding)

Free from withholding of federal income tax. A person must meet certain income, tax liability, and dependency criteria. This does not exempt a person from other kinds of tax withholding, such as the Social Security tax.

financial records

Spending and income records and items to keep for tax purposes, including paycheck stubs, statements of interest or dividends earned, and records of gifts, tips, and bonuses. Spending records include canceled checks, cash register receipts, credit card statements, and rent receipts.

withholding ("pay-as-you-earn" taxation)

Money that employers withhold from employees' paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, Social Security taxes, and state and local income taxes in some states and localities.

Opening the Lesson

Explain to students that the U.S. income tax system is built on the idea of "voluntary compliance." It is the responsibility of the taxpayer to keep the necessary records, file a return on time, pay any required taxes, and meet other requirements of the tax law. Taxpayers voluntarily follow the steps the tax system lays out. Not doing so can result in penalties.

Ask students:

• How do most taxpayers pay their income taxes? Most people pay through the "pay-as-you-go" system.

 

Make sure students understand that most people's income is from salary or wages earned in a job. In the "pay-as-you-go" method, the tax paid as income is earned or received during the year. For example, an employer withholds tax on the basis of wages paid and information the employee provides on Form W-4. This process is called tax withholding.

Discuss with students the advantages of withholding for taxpayers. Help them understand that without tax withholding, many people would find it difficult to save enough money to pay their income taxes all at once. Ask students what the advantages of withholding are for the government. Explain that government services might be disrupted and undependable if they were not funded on a continuous basis

Developing the Lesson

Ask students whether they are familiar with Form W-4. If possible, visit the IRS Forms Page and print a copy of Form W-4 to show students. Ask students:

• Why do employers need a Form W-4 from each employee? The form helps the employer determine how much to withhold from the employee's paycheck.

 

Discuss what could happen if students write their Social Security number incorrectly, use a nickname or name that is different from the one on their Social Security card, or make a mistake on their address. Point out that incorrect information might delay or prevent a tax refund and that students might not receive proper credit for Social Security taxes they have paid.

Point out that Form W-4 reminds employees to keep the worksheet part of their Form W-4 for their financial records. Other items people should keep for their records include paycheck stubs, statements of interest or dividends earned, and records of gifts, tips, and bonuses. Spending records include canceled checks, cash register receipts, credit card statements, and rent receipts.

Advise students to create a simple system for recording their finances. When income is small, an envelope system works well. Records can be stored in envelopes that are marked by months, by jobs, or by expenses-such as car payments. As income and expenses increase, some type of formal record sheet is necessary. Explain that students could use budget books, computer programs, or even a notebook with ruled paper marked into columns. Whatever system they use, they should store their records in one particular desk drawer, a filing cabinet, or a special box.

Concluding the Lesson

Make sure students understand the purpose of IRS Form W-4 and the importance of filling it out correctly. Remind students to keep accurate financial records.

Links

Link to Module 1-Payroll Taxes and Federal Income Tax Withholding for a guide to filling out Form W-4.

See Theme 4, Lesson 1 for more information on "pay-as-you-go" withholding.