How do taxes affect the amount of money you actually earn from your job?

Question

Ok, I'm 16 and I'm starting my first job on Friday. MY starting wage is going to be $7. 50 an hour and I work 19 hours a week so I should be earning $142.50 per week. However, everyone keeps saying something about taxes and how what I earn is actually going to be lower.....could someone explain this concept to me?

Answer 1

The $142.50 is your gross income. Net income (the amount you get to take home) is after taxes are deducted. The following taxes will be deducted from your paycheck.

Social Security Tax: This is 6.2% and in your case will be charged on every penny you make. This will come to $8.84.

Medicare Tax: This is 1.45%, which is $2.07. Regardless of how much income you make, you are taxed for Medicare.

Sometimes Social Security and Medicare Taxes are referred to collectively as FICA taxes.

In addition, you might have state taxes coming out but those vary across states. Many of these can be claimed at the end of the year, and you should receive a refund.

Then there's the Federal Income Tax. When you first start a new job you are required to fill out a Form W-4. This indicates how many withholding allowances you want to claim. Many people get this confused with your exemptions (referring to how many you can claim on your tax return). In your case, even if you're claimed as a dependent on your parent's returns, you can claim either Single and 1, or Single and 0 (allowances, that is).

Single and 1 will have less taxes taken out each pay period (in your case it's $3), while filing single and 0 will have more taken out ($9). This doesn't affect how much you "pay" in taxes. What is deducted from your paycheck you can take against your taxes owed at the end of the year. If you have more taken out during the year, you'll receive a larger refund, and vice versa.

I'm assuming you're still a dependent, which means if you make more than $5,150 in earned income (W-2), you'll be required to file a tax return. Anything over that amount will be taxable income and you will owe taxes on it, but remember your federal income tax withholding will be credited to this amount first. Even if you're not required to file, you can still file a return to claim the Federal taxes you paid in back at the end of the year.

So, all that to say this:

If you file single and 0, you'll get $122.59/week.
If you file single and 1, you'll get $128.59/week.

But more than likely, you can get a portion of the Federal taxes of either $3 or $9/week back at the end of the year.

Hope this helps!!

Answer 2

What you actually EARN is the full $142.50. What you are actually PAID will be lower. Your company is required to withhold taxes, social security, and FICA. Your actual paycheck will be around $120 to $130 depending on how you filled out your W2.

Not to worry though. You should be able to file for a full refund at the end of the year.

Answer 3

They'll take out 7.65% of your income for social security and medicare.

Since we're already almost halfway through the year, this year you're not likely to owe any federal income tax, but if you make that much each week next year and are a dependent of your parents or someone else, you'll owe some income tax for 2008.

Depending on where you live, you might owe some state and/or local income tax this year or might not.