Payroll Tax Basics

Understanding payroll taxes and common tax forms

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.

Start by explaining what's withheld

An employer is required to withhold and/or pay payroll taxes on an employee's behalf. On first glance, this can seem like a lot because it includes:

  • State and federal income taxes
  • Social Security withholdings
  • Medicare taxes
Need a refresher course on these and other tax topics? Learn more.

Introduce basic tax forms

Here are some of the fundamentals of common tax-related documents and forms. Click on the link to see actual examples of the forms.

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 determine the appropriate number of allowances, you can use the withholding calculator at IRS.gov.


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.

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.

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.

(1109-10800)

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.

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