Do you remember your first paycheck? The thrill of receiving your own income ... and the shock of discovering how much the government took away? Helping your teen understand gross and net earnings is an important way to manage expectations. This can also be a great way to introduce the concept of saving on a pre-tax basis.

An employer is required to withhold and/or pay payroll taxes on an employee’s behalf. These include state and federal income taxes, as well as Social Security and Medicare taxes.

Here are some of the fundamentals of common tax-related documents and forms:

Understanding Form W-4

Anatomy of a Paycheck
Understanding Form W-2
Understanding Form 1099

Understanding Form W-4

When your teen begins a new job, he or she will be asked to complete a Form W-4. Filling out a W-4 helps the employer calculate the correct amount of federal income tax to withhold. To complete the W-4, your teen must determine the number of withholding allowances to claim, which in turn determines the amount of federal (and often state) taxes withheld from each paycheck. The IRS website offers a useful withholding calculator for determining the appropriate number of allowances.

 

Anatomy of a Paycheck

Every paycheck should be accompanied by a pay stub, with information about the employee and the pay period. When your teen receives the first paycheck, be sure to confirm that all of the personal information (i.e., name, address, Social Security number) is correct.

Understanding Form W-2

A W-2 reports an entire year’s earned income (including all tips and bonuses).

Tip income should be tallied daily, reported to employers monthly and included on an annual income tax return, where it’s reported as wages.

Employees usually receive at least three copies of the W-2: one for filing with the federal tax return, one for filing with the state tax return and one for filing away in their own records.

Understanding Form 1099

A 1099 is an annual statement detailing earnings other than wages, salary and tips. Your teen might receive a 1099 form if he or she receives interest, dividends or capital gains distributions. Forms are sent from those who paid the earnings, such as a bank, mutual fund company or brokerage firm.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The types of savings and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction or strategy for his or her own particular situation. The examples mentioned are for informational purposes only and not intended to represent results you should expect in the future. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.