Pay Taxes, What!?!

CASH KID

We gotta pay taxes, what!?! Many kids are shocked to learn just how much is taken out of that first paycheck. In this episode, we break down the basics of what are taxes, why we pay them, and what's with all those "W" forms. Oh, and who is Uncle Sam? Let's talk taxes in this episode of the Cash Kid Podcast. Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

There are only two certains in life…. death and taxes. - Said everyone as I’m told it’s a pretty old joke.

What are taxes, who pays them, why are there so many W forms involved, and why do we pay taxes?

Oh, and who is Uncle Sam?

Well, you’re about to find out in this episode of the Cash Kid Podcast. The Cash Kid Podcast is underway!

Intro tease:

So you’ve got some cash. Maybe from an allowance, or that money your grandma gave you for your 7th birthday. Here you go, sweetie. Thanks, Grandma.

Whatever it is, what are you going to do with it? Spend it, hide it away… or maybe invest it? Let’s start learning how to make that money grow.

Time to learn how to be a cash kid.

Okay. So let's talk about taxes. I hear this topic causes a lot of anxiety in adults. I'm hoping we can educate my generation about it earlier to have a better understanding of it and maybe develop less anxiety.

Joining us today is Joe Proffitt with Dark Horse CPAs. Mr. Proffitt, welcome to the show.

Joe Proffitt:

Hey, great to be here, Cash Kid. I very much appreciate the time. And I agree if we can start talking about taxes younger, maybe I wouldn't have freaked out about them when I got to be an adult as well.

Cash Kid:

Yeah. So welcome. And first off, just tell us a little bit about yourself.

Joe Proffitt:

Sure. I'm a CPA based out of Little Rock, Arkansas. I work with clients all over the country, from small business owners to individuals that don't necessarily own a business but need help with their tax planning and filing. And the main thing for people to do what I do. Basically, the U.S. tax system is complicated and sometimes you need a little bit of help and things get to be more than you can handle on your own.

Cash Kid:

Yeah. So what does Dark Horse CPAs do for its clients?

Joe Proffitt:

Great question. So Dark Horse specializes in serving small business owners. Specifically, we provide tax and accounting services ranging from basic bookkeeping to what we refer to as CFO engagements. We essentially help business owners compile their financial information and put it into a format that allows them to know where they're at financially to help them with projections as needed, or on the side of the tax work we do, compliance work with the basic business tax filings or just essentially try to help make sense of the really complicated tax structure we have here in the U.S..

Cash Kid:

All right. Let's talk about taxes, Mr. Proffitt. We’ll, start simple. What is the basic reason why we pay taxes?

Joe Proffitt:

Great question again. So taxes provide money to the government so that they can provide services for we the people. In an ideal world, taxes provide a range of services, whether it be assistance for individuals needing a little bit more help provides money for constructed roadways. Essentially, taxes are the way the government gets money from its citizens so that it can continue to function as the government.

Cash Kid:

What all do we pay taxes on?

Joe Proffitt:

Pretty much anything that you're going to spend any time you spend money or receive money, you're probably going to be subject to some sort of tax. So you get sales tax on groceries, cars. You have various tax for major purchases like a home purchase, you pay property taxes, or when you do own various pieces of personal property. So the major categories of taxes across the U.S. are going to be your income tax, your property taxes and your sales are what we refer to as excise taxes.

And the sales and excise is based on things that you actually go out to purchase and are based on the usage that way.

Cash Kid:

In episode one of of season 2, a financial teacher at a local high school stated a lot of his students were shocked when they got their first pay check to see how much they paid in taxes, leaving them with a lot less than what they thought they would take home. Can we break down the different taxes in what we pay for and why we pay them from our paycheck?

Joe Proffitt:

Absolutely. And I remember it hurt my feelings the first paycheck I got and when I was a kid, seeing how much they hold out. And so when you receive any anyone that goes out and works for an employer and receives a paycheck, they're going to have your federal income tax withholding, state where it actually occurs depending on where you live.

And then you're going to have additional taxes that we refer to as FICA. And what FICA is, that’s FICA, is the Social Security and Medicare tax withholdings. Now, the federal and state can vary, but FICA is based on set percentages and it goes into the Social Security system and the larger Medicare system. It essentially helps provide Social Security income and Medicare coverage for the elderly and people that are in that retirement phase.

Cash Kid:

Ok, we pay taxes buying everyday things and in our paychecks. So why do we have to file our taxes every year in April?

Joe Proffitt:

I ask myself that same question all the time. Now with if you have a straightforward tax situation, say you receive a W-2, you just work one job, you receive a W-2, then a lot of the time, the way tax withholding works, it's an estimate of what your actual tax is going to be for the year because we we don't all pay a flat tax based on the income that we have.

So throughout the year, the withholdings from our checks for the income tax piece is a guess at what our year in income is going to be and what tax bracket we go in. Basically, the more income you make in the U.S., the higher your tax rate as the income level goes up. So we file tax returns at the end of the year to confirm exactly what our taxable income was for the year, to take advantage of any tax credits that are on there to report any income that wasn't otherwise reported, say, if you're self-employed or if you're operating, say, a lawn mowing business, if you're wanting to make some extra money on there. And that's where we get to either true up to pay in what we owe additionally to the IRS or request a refund if we overpaid throughout the year. The point at which we get even with the IRS or the state that we're filing in.

Cash Kid:

And maybe Mr. Proffitt just if you can explain quickly, what's a W-2?

Joe Proffitt:

Right. Gotcha. And just to clarify, a W-2 is a year in tax form that goes out by the end of January every year for anyone that receives a paycheck from an employer. So if you go and work in part time job or if you're a full time employee of a company, you're going to receive a W-2. So anyone that receives a regular paycheck with tax withholdings, you'll receive a W-2 at year end, and that's what you use to file your taxes.

Cash Kid:

Yeah. So are there tax benefits that teens and college students can take advantage of that will allow us to get a bigger refund?

Joe Proffitt:

That is a really good question. So with teen college students there, if they are providing their primary support, there are various educational tax credits, two specific ones to pay attention to are the American Opportunity Tax Credit and the lifetime learner tax credit, and whether they apply for those on their individual return, if they file and support themselves or if they're still being supported by their parents and listed as a dependent, they're that's a great resource for those people as well, whether, again, whether they're still on their parent's taxes or if they're independent and filing on their own.

For teenagers, the the majority of the time, the best thing for teens is to just make sure that you have sufficient withholding. The standard deduction when you're a dependent is lower than if you're an adult earning the same wages. But most of the time, what I see with kids that are working part time jobs, you'll usually have good withholding that you end up getting a refund.

So honestly, the best thing to do is just make sure that you fill out. Actually, we need to take a step back for a moment. Whenever you first go to work for an employer, you're going to fill out a form. A W-4, and I know I'm talking about a lot of W forms is something that whenever you go to work for an employer, they're going to hand this to you and expect you to know how to fill it out.

And what it tells them is how much to withhold on your taxes. And for the vast majority of teens that are out there working a job, you're going to want to put single and zero on this W-4 form because that makes sure that you have the most held out of your check that you can and really that's the main trick to it is just making sure that you have sufficient withholding.

Cash Kid:

Do tax laws and regulations change a lot, making it harder for the everyday person to keep up with the rules?

Joe Proffitt:

So year after year we'll have a few minor changes here and there. And every so often we have a major overhaul of the tax system. There was one that occurred back in the 1980s, well before, well before your time, but there was an additional big tax law change back in 2017. Most of the time it's pretty business as usual other than specific changes with various different tax pieces.

And that's where people like me come in because my career is based on staying up to date on any tax law changes. And that's why that's why the accounting profession exist in the first place, at least from public to to help people keep up with tax law changes and make sure they're taking advantage of everything that is allowed to them.

Cash Kid:

What advice do you give your clients when dealing with taxes?

Joe Proffitt:

Preparedness, Proactive planning is the best. Is one of the best resources that you have. Just finding an accountant that you feel comfortable communicating with and having an issue that I see often working for various clients is that they come through. We file their tax return, but there's not very much we can do once we're outside of the year.

So honestly, just proactive planning during the year is one of the best, best benefits that or the best advantage that anyone can take when it comes to tax compliance. Making sure that you don't pay more than you actually are required to pay in your taxes.

Cash Kid:

Yeah. I don’t want to pay more than required for sure.

Is there anything we haven't asked you that you would like to share with our audience?

Joe Proffitt:

Something to bear in mind whenever for your audience. I mean, anyone listening here is going to have a more entrepreneurial spirit, and I admire that very much, especially at such a young age. I will say that there is a difference in going to work the way you're paid, in the way you pay taxes when you receive a paycheck, meaning that you'll get a W-2 at the end of the year, your taxes are withheld from your check during the year.

Now, if you go out and are operating as an independent business, basically like a like a small business owner would where you're not receiving a paycheck, then you may have to make tax payments throughout the year on your own. And if you get to that point, then definitely you'll want to either reach out to your parent or guardian, someone that's at least got access to the resources that you'll need or potentially even reach out to an accountant just in order to get a little bit of additional information.

Because there's one one specific tax when you're self-employed, it's called self-employment tax. And it can be a big, nasty surprise for people when you go from receiving a paycheck to working for yourself. And so that would just be one of the main pieces, I would say, for anyone that's wanting to strike out to business on their own.

Yeah, I'm sure.

Cash Kid:

I was going to say is an example like let's say a kid runs a lawn mowing business. Would they need to keep like a book of their expenses and jobs?

Joe Proffitt:

So you'll need to keep track of the income that you're receiving from your various customers. And you'll also, especially want to keep track of any expenses that you have. So we're talking gas purchases, any additional equipment that you buy, any repairs that you have to pay for, because these are the things that reduce what your taxable income is.

If, let's say, a child or a you know, let's call it business owner, call it what it is, they make $10,000 in a year and that's their gross revenue, what they received from their customers. You'll want to have a listing of all of those expenses that you paid. Otherwise you're going to end up paying tax on the full amount of that 10,000 that you made, even though that's not the money that you kept, You had $3,000 in expenses.

So really, you should only pay tax on $7,000 and great resources are out there for keeping track of your expenses. To start off with a smaller business like that, I recommend spreadsheets. Whether you're you prefer Excel, Google Docs, whatever your preferred spreadsheet platform, it will just make life much easier for you. And when it comes to expenses, you want to list who you paid, when you paid them, what it was for and how much it was.

And that's the kind of information that you'll send to your account accountant a year end, and then they can put together your business filing.

Cash Kid:

Mr. Joe Proffitt, we appreciate your time and your expertise. Thank you for joining us on the Cash Kid Podcast and advancing the financial knowledge of the kids everywhere.

Joe Proffitt:

Absolutely has been a great pleasure and let me know any time you want me to come back.

(music)

Now back to the question on who is Uncle Sam? Have you heard this before? Uncle Sam looks like an older man with white hair and beard, in a top hat, pointing at you. Just Google it Cash Kids. It’s a personification of the United States of America or more specifically, the internal revenue service IRS.

During the War of 1812, the United States Army received supplies from a variety of organizations and individuals, one of which was Samuel Wilson, a meat packer from Troy, New York. He labeled his barrels of beef with “U.S.” to indicate U.S. government property, but soldiers referred to the “U.S.” as Uncle Sam.

So when you hear someone say, “Uncle Sam is gonna get you eventually.” They very well could be talking about tax season, and how the government or “Uncle Sam” will get those tax dollars from you one way or another.

Cash Kids, we have more terms, discussions, and skills to learn. Thank you for tuning in to this episode. If you have a question, please, reach out to me at [e-mail] and I’ll answer it in a future episode. You can also reach out via our website at cashkidpodcast.com.

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Cash Kid, out!

Disclaimer:

The information presented represents the views and opinions of the guests. This show does not intend to provide personal investment advice through this podcast. This content has been made for informational and educational purposes only. To make a full and informed investment decision, we advise you to speak with a financial advisor and for kids, definitely your parents first before investing.