The Center for Financial Empowerment, the nonprofit organization founded by SCE Credit Union, has a mission to educate high school youth with personal finance concepts, preparing them to make smart financial decisions as they move into adulthood. As part of that mission, we encourage parents to take an active role in helping their teens establish strong financial habits for managing money.
In this post of our “Teach Your Teen” series, we’re providing ways to help your teen understand paycheck basics.
Teach your teen about receiving a paycheck
Most young people get their first job while they’re still in high school, or shortly after graduating. After all, earning their own money is a major step towards becoming independent and being able to pay for the things they want. But the process of getting a job and earning a paycheck can be confusing if they don’t know what to expect. You can prepare your teen by helping them understand what’s required to start working, how their pay will be affected by taxes, and how to make sense of their paycheck stub.
One of the first things a teen will have to do when they start a new job is to complete several forms that are required for working in the United States.
|W-4||Also called the Employee’s Holding Certificate, this IRS form determines the percentage of taxes withheld from the paycheck. It can be confusing to understand, so teens will need a parent’s help. It’s a good idea to download the form ahead of time and help your teen fill it out – this will eliminate some of their stress on their first day on the job.|
|I-9||Known as the Employment Eligibility Verification Form, it’s used to verify a person’s eligibility to work in the United States.|
|Identification||The employer will require the worker to provide valid, government-issued photo identification, such as a state identification card, driver’s license, passport, etc.|
|Taxpayer ID number||The employer will require the worker to provide a Social Security Number or other valid Taxpayer ID Number.|
|Work permit||If the worker is a minor and still in school, the employer may require a work permit from the school.|
Once the initial paperwork is completed, a new worker will have to select a method to receive payment. The most common methods of payment are direct deposit, payroll card, or a paper check. Employers don’t always offer all three methods, so the options may be limited.
|Direct deposit||The paycheck is electronically deposited directly into the employee’s bank account. On paydays, the employee receives a paper or electronic copy of their pay stub, detailing their earnings, tax withholdings and other deductions. The teen must have their own bank account to set up direct deposit.|
|Payroll card||The employer issues a prepaid debit card to the employee with a balance of the payroll period’s net income.|
|Paper check||The employer physically provides the employee with his/her paycheck. The pay stub is attached to the paycheck showing the breakdown of earnings and tax withholdings. The employee must then exchange the check for cash or deposit it into his/her bank account in order to spend the funds.|
Understanding a pay stub
A pay stub describes the employee’s earnings, tax withholdings and other paycheck deductions for the current payroll period. Parents should help their teens understand the different items on the pay stub and what they mean.
|Payroll period||The length of time for which an employee’s wages are calculated. Usually weekly, bi-weekly, twice per month, or monthly.|
|Gross income||The total amount of money earned during the payroll period before tax withholdings and deductions.|
|Net income||The amount of money the employee receives after all tax withholdings and deductions.|
|Tax withholdings||The amount required by law for employers to withhold from earned wages to pay taxes. On a pay stub, these are separated into categories including federal taxes, state taxes and FICA.|
Federal and state taxes are used to provide public services such as roads, schools, police, fire and emergency services.
The amount withheld depends on the amount of money earned and the information provided on the employee’s W-4.
FICA (Federal Insurance Contribution Act) includes two separate taxes:
|Year-to-date||Shows the totals of all earnings and deductions from January 1 of the current year to the last date of the payroll period.|
An employee should always check his/her pay stub for accuracy, and report mistakes immediately.
A teen’s first job – and their first paycheck – is an exciting new milestone in their journey to becoming an adult. Helping them understand what to expect and how to prepare will ease the transition and make the process more fun and less frustrating.
- Activity – Navigating Paycheck Stubs
- Video – Understanding Your Paycheck
The Center for Financial Empowerment is a 501c3 nonprofit organization whose mission is to empower disadvantaged youth through financial literacy education. Find out more about our work at Center4FE.org.
Paycheck Basics, Take Charge Today, October 2020