Guest post by Chris Shannon, Financial Literacy Consultant
It can be a harsh lesson. A teen proudly brings home that first paycheck, having already calculated (and spent!) the total earnings. The envelope, please! After rereading the check many times, that teen is horrified to have less pay than anticipated, and rather than rejoicing in newfound earnings and increased independence, the teen has a negative disposition towards the pay, the employer, the government, and generally feels ripped off.
And why not? Up until that point, teens have received the full cash value of an allowance, cash gifts (from a birthday or holiday) or informal employment such as babysitting, yard work or dog walking. If the teen charges $10 every hour to babysit, and babysits for five hours, the teen expects, and receives, fifty dollars. No wonder tax withholdings and income deductions from a first paycheck come as quite a surprise.
This summer, think about instituting a “Parent Tax” on cash gifts or informal earnings to prepare your teen for the reality we all face as adults. It’s funny—like Tim Slagle, I have been doing this for years at Halloween time—rifling through the kids’ sacks for some choice candy and pronouncing it a “Mommy tax”—but didn’t realize until recently that this is a teachable moment. Madison DuPaix from About.com agrees: withholding from a cash allowance or early earnings helps teens understand how taxes work and avoids confusion and frustration later on.
Instead of dividing the teen’s earned income into the traditional three categories—one for savings, one for spending and one for sharing—divide it instead into fours, that fourth portion being the Parent Tax. The “Parent Tax” is the cost of providing the “infrastructure” supports your teen enjoy at home. This can be a good way to explain federal and state taxes, why we pay them and what they pay for. Create family tax categories that parallel federal tax costs: improvements to a bedroom or hallway (roadways), security for the house or internet (defense), first aid supplies and medicine (health care) and yard upkeep (parks and recreation).
Some parents use collected teen tax money towards the household expenses described above, building a teen’s sense of personal investment in the family household. eHow recommends collecting this money to use towards family activities. I’ve even heard of one father who saved all of the Parent Tax withheld to give it back to his teen when she turned 18.
But the lesson doesn’t have to end there. If you have the time and capability, prepare a tax statement at the end of the tax year, calculating your teen’s gross earnings and total Parent Tax withholdings to review with your teen. You could also have your teen go through the motions of filing a tax return, perhaps even leading to a full return of the Parent Tax if the teen earned less than a set amount. In the end, it’s up to you to decide how to maximize this teachable moment.
Do you tax your teen? Share what you do with us!
About Chris Shannon: An educator for over twenty years and a mom of two young kids, Chris spends most of her time as a financial literacy consultant for rAsa consulting. Chris has developed educational materials and trainings for the National Endowment for Financial Education, the National Jump$tart Coalition, the Massachusetts Office of Consumer Affairs and Business Regulation, and many credit union organizations. She currently serves on VISA’s Educator Advisory Council.
© Your Teen’s Money Skills, Inc. 2012 All rights reserved worldwide.