A Teen’s Guide to Preparing for Taxes

A Teen’s Guide to Preparing for Taxes: What You Need to Know Before You Enter the Workforce or Start Your Own Business

As a teenager, the last thing you’re probably thinking about is taxes. But whether you’re getting ready to join the workforce or start your own business, understanding taxes early on will set you up for success. Taxes might seem confusing at first, but with the right knowledge, you can confidently manage your finances and avoid any unexpected surprises when tax season rolls around. Here’s a simple guide to help you prepare.

1. Understanding What Taxes Are and Why They Matter

Before we dive into the details, it’s important to know what taxes are and why they’re important. Taxes are payments that individuals and businesses are required to make to the government. The money collected helps fund things like schools, roads, public safety, and other essential services.

When you start earning money—whether from a part-time job, freelance work, or your own business—the government will take a portion of your earnings in the form of taxes. The amount of taxes you pay depends on how much you earn, the type of work you do, and where you live.

2. Know the Types of Taxes You’ll Need to Pay

There are several different types of taxes you might encounter once you start earning income:

• Income Tax: This is the tax you pay on the money you earn from a job or business. Income tax is usually deducted from your paycheck if you work for an employer. If you have your own business, you’ll need to calculate and pay this tax yourself.
• Self-Employment Tax: If you run your own business or do freelance work, you’re considered self-employed. This means you’ll need to pay both the employee and employer portions of Social Security and Medicare taxes. Together, this is known as the self-employment tax.
• Sales Tax: If you sell products or services as part of your business, you may need to collect sales tax from your customers and send that money to the government.
• Property Tax: If you own property as part of your business, you may need to pay taxes on it. This is more relevant if you’re running a business with physical assets like real estate or equipment.

3. Getting Your Documents in Order

When you start working, your employer will ask you to fill out a form called the W-4. This form tells them how much money to withhold from your paycheck for federal income taxes. If you’re self-employed, you won’t have an employer withholding taxes for you, so you’ll need to track your income and expenses carefully.

For self-employed teens or small business owners, it’s important to save receipts, invoices, and any documents related to your earnings and business expenses. You’ll need these when it’s time to file your taxes, as some of your expenses can be deducted, meaning you’ll owe less in taxes.

Here are some important tax documents to be familiar with:

• W-2: This form shows how much money you earned and how much was withheld in taxes if you work for an employer. Your employer will give you this form at the end of the year.
• 1099-NEC: If you’re self-employed or doing freelance work, you may receive this form from clients who paid you more than $600 during the year.
• Receipts and Invoices: Keep track of all business-related expenses if you’re self-employed. These could include costs for materials, advertising, or even internet fees if you work from home.

4. Saving for Taxes Throughout the Year

One of the biggest mistakes teens (and many adults) make when entering the workforce or starting a business is not setting aside enough money for taxes. If you work for an employer, they will automatically withhold taxes from your paycheck. However, if you’re self-employed, you’ll need to put aside money on your own.

A good rule of thumb is to save about 25-30% of your income for taxes, especially if you’re self-employed. That way, when tax season comes, you won’t be caught off guard by a big bill.

If you expect to owe more than $1,000 in taxes for the year, you’ll need to make quarterly tax payments to the IRS. This means you’ll estimate how much you owe and make four payments throughout the year, instead of waiting until the end of the year to pay it all at once.

5. Learning About Deductions and Credits

Tax deductions and credits can help reduce the amount of money you owe in taxes, which is great news for both employees and entrepreneurs. Here are a few examples that might apply to teens:

• Standard Deduction: This is a set amount of money that everyone is allowed to subtract from their income, reducing the amount that is taxable. For 2023, the standard deduction for a single filer is $13,850. If you earn less than this amount, you may not owe any federal income tax.
• Business Expenses: If you’re running a business, certain expenses can be deducted from your income. These might include things like office supplies, advertising costs, and even a portion of your home if you use it as a workspace.
• Education Credits: If you’re attending school while working, you may qualify for education-related tax credits like the American Opportunity Tax Credit or the Lifetime Learning Credit, which help reduce your tax bill.

6. Filing Your Taxes

When tax season arrives (typically in the spring), you’ll need to file your tax return. If you’re working for an employer, you’ll use the information from your W-2 form to file. If you’re self-employed, you’ll report all your income and expenses on a form called the Schedule C as part of your tax return.

You can file your taxes online using programs like TurboTax, or you can hire a tax professional to help. Many free resources are available for teens and students with simple tax situations, such as the IRS Free File program, which allows you to file your taxes for free if your income is below a certain level.

7. Understanding the Consequences of Not Paying Taxes

Failing to pay taxes or not filing on time can result in penalties, interest charges, and stress. It’s crucial to stay organized throughout the year so that tax time isn’t overwhelming. The IRS may charge penalties for:

• Filing late
• Failing to make quarterly payments if you’re self-employed
• Underpaying your taxes

The good news is that as long as you stay on top of things, filing taxes doesn’t have to be a big headache.

8. Seek Help When You Need It

Taxes can be confusing, especially when you’re just starting out. If you’re unsure about anything, don’t hesitate to seek help. Ask your parents, a trusted adult, or even a tax professional for advice. There are also tons of online resources and videos that can help break down the process step by step.

Conclusion: Start Early, Stay Organized, and Be Confident

While taxes may seem complicated at first, they are simply a part of earning money and running a business. By understanding the basics and staying organized, you can avoid the stress of tax season and focus on growing your skills and business. The earlier you start learning about taxes, the more confident and prepared you’ll be as you enter the workforce or begin your entrepreneurial journey.

Remember, learning how to manage taxes is an important life skill, and mastering it early on will set you up for financial success in the future!