A Guide To Your First Paycheck and Paying Uncle Sam By Sue Fox Thursday, October 5, 2006

So you think you’ve found a great summer or part time job, and you’re lucky enough to be making more than minimum wage. But many first-time employees are surprised to learn that they’re not taking home all of that hourly wage. A surprising amount goes to federal, state and local taxes, and mandatory contributions to government programs, such as Social Security and Medicare.

Here’s a guide to what to expect when you see your first paycheck, the information your employer will need to determine how much of that paycheck you actually get to take to the bank, and finally, tax reporting requirements on that money you earn.

Getting on the Payroll

A good part of your first day on the job will be filling out paperwork. Your employer is required by law to collect and report to the government certain information about you to identify you for collecting taxes and social security, which provides government entitlements for retirement or disability.

First, a word about your social security number. Your social security number is also one of the first pieces of information your new employer will need from you to get you on the payroll. If you don’t already have it memorized, start now because you will be using your social security number on an almost daily basis for the rest of your life. It identifies you for tax reporting and many other purposes, such as applying to colleges and drivers licenses. You will need to use it to open bank and brokerage accounts, get a driver’s license and passport, and obtain many other services.

Finally, a caution about disclosing your Social Security Number to someone other than your employer. Since your Social Security Number is unique to you and no other person shares that number, many people will want to use it as a way to identify you. Be careful. With identity theft rampant these days, don’t disclose your number to anyone who does not have a good reason to need it. In particular, don’t respond to email requests for your Social Security Number or any other personal information. Most institutions will NOT ask you to respond to an email requesting such information, so if you get one, you can bet it is a crook representing themselves as a bank or credit card company in order to get your private information.

One of the first forms your employer will require you to fill out is an Internal Revenue Service (IRS) Form W-4, Employee’s Withholding Allowance Certificate, indicating the number of “allowances” you are claiming for tax reporting purposes. Your employer will use this number to determine how much she is required to withhold from your paycheck each pay period for taxes. The more allowances you take, the less money you’ll have taken out of your paycheck. Think of withholding as a mandatory deposit into a savings account for the payment of your taxes, based on a tax return which must be filed by April 15th of the following calendar year. (More on tax filing requirements, below.)

The Form W-4 provides a Worksheet to determine the number of allowances each employee is entitled to. Generally, this number is based on your marital status, number of dependents, tax credits to which you are entitled, and most importantly for students and young employees, whether some other person – most likely your parents – can claim you as a dependent on their tax return. For this reason, you may want to fill out the W-4 with your parents so that you can confirm whether they take you as a dependent.

Once you have the required information, filling out the Form W-4 is relatively easy, and the instructions are clear. You will need to provide your name, social security number, mailing address (use your home, rather than school or other temporary address), and marital status. There is also an important option to claim a total exemption from any tax withholding in the event you meet certain criteria: first, you had no tax liability in the prior year; and second, you expect to have no tax liability in the current year. If you qualify, you’ll have nothing withheld from your paycheck.

Whether or not you will be required to pay taxes usually depends on how much (or little) money you make in a given year, and that will be discussed in more detail later. Remember – if you claim a full exemption from withholding, you’ll take home more of your paycheck, but be careful. If you withhold too much from your paycheck each pay period, you may find you owe the government money when you file your tax return next April 15, and if you’ve already spent the money, you may be asking mom or dad for a loan.

After you provide all of the information required on the W-4, you will need to sign and date it before providing it to your employer.

What Your Pay Stub Will Look Like

How often you get paid depends on your employer, but most will give you a paycheck twice a month. The check portion should be cashed or deposited into a bank account as quickly as possible. Don’t hold on to the check, since it could get lost, and if it gets too “old,” your bank may not want to take it. Usually, once it is more than six months from the date a check is issued, you may have trouble cashing or depositing it.

Attached to your paycheck will be a “stub,” which will contain your earnings and deduction information. When you see your first pay stub, you may be surprised by the number of deductions from your salary or “gross pay.” Each pay stub is set up differently, depending on the payroll software or company your employer uses. The information, however, will be essentially the same. Make sure your name, social security number, and other information, such as your address, is correct. Errors can be hard to correct with the IRS, and may cause tax reporting problems for you.

One of the first entries on your pay stub will be your “gross pay,” or earnings. Your gross pay is the amount of money you are entitled to – based on your hourly wage or salary – before any adjustment for taxes or other deductions. Make sure that your gross pay is correct. There will be an entry on the pay stub for your gross pay for that pay period, as well as a year-to-date (YTD) figure showing how much you have earned for the year.

There will also be deductions for taxes – federal, state, and local, including city taxes, where applicable. Each state and municipality has its own tax code, so there may be a lot of different taxes taken out. And if you work in a state other than where you live, you may find taxes taken out for more than one state.

There are also deductions for Social Security and Medicare. These are government-sponsored programs which each employee pays into over his lifetime, and from which he will receive benefits upon reaching retirement age or becoming disabled. The amount of benefits to which you will be entitled depend on the amount you have paid in, so you want to make sure that the correct amounts are being withheld by your employer.

Finally, you may be lucky enough to work for an employer who has a retirement or 401(k) plan in which you can participate. If so, your contribution into such a plan will be made before your taxes are calculated. This means you do not have to pay taxes on your retirement contributions, and they will grow tax free until you are required to take them out, generally when you reach the age of 70 1/2. But be careful about putting away more than you should into a retirement plan because there are penalties if you need to take the money out before you reach 59 years old. As a general rule, however, it is never too early to start saving for your retirement, so take advantage of your employer’s plan, if possible.

Tax Return Filing Requirements

Once you have a certain amount of gross income in a given year, you’ll be required to file a tax return, IRS Form 1040, U.S. Individual Income Tax Return. State returns are also usually required, so check your local laws. These income tax returns allow the federal and local governments to determine whether they have received their fair share of taxes, based on the income earned and deductions allowed each year.

What is “gross income”? It can be many things, most typically for a young worker their earnings. Your wages and salary will be reported to you by your employer or employers on a Form W-2, which is discussed in detail, below. But there are a surprising amount of other sources of income, such as interest on your investments, dividends, tips, fees, royalties, and fringe benefits. Lottery winnings, gambling income, most prizes and awards – even gain from illegal activities -- are also includible in gross income. An inheritance or gift is not taxable to you, as well as certain personal injury awards.

The gross income levels at which a single individual must file a federal income tax return for 2005 was $8,200. For married couples and people over 65, the income levels are higher. Most young workers will be taken as a “dependent” on their parents’ tax returns, which means their parents are entitled to take a dependency exemption for their child on their tax return. If you are a dependent child, you must file a tax return only if you meet certain income requirements. Income from investments owned by a child under age 14 is generally taxed at her parents’ higher tax rate (the so-called “kiddie tax”) in order to discourage parents from trying to shift the tax burden to their children, who generally pay tax at a lower rate.

If you meet the applicable gross income test, a return must be filed even though your exemptions and deductions result in an elimination of tax. And even if the gross income test is not met, a return must be filed whenever a tax refund is due because too much tax was withheld over the year.

4. Filing Your Tax Income Tax Return

In order to complete your income tax returns, you will need information from your employer, an IRS Form W-2, which he is required to provide to you by January 31 of the following year. This will give you plenty of time to prepare and file your income tax returns, which are due April 15 of the year following the close of your tax year.

Your W-2’s, which must be attached to your tax return when filed, will indicate the total amount of wages, tips and other compensation paid to you by your employer for the year. It will also state an annual total of all federal, state and local income taxes, social security tax, and Medicare tax withheld by the employer from your paycheck.

To complete your tax returns, you will also need to compile other information, such as 1099’s, which are issued by your banks and investment companies indicating the yearly interest and dividends you have earned on your investments and other sources of income. You should also compile your deductible expenses to see if you meet specific requirements for taking deductions to reduce the amount of your taxable income.

For filing your return, many people still prepare paper tax returns, which must be post marked no later than midnight of the filing due date. Electronic filing is becoming more and more common, and is available to qualified filers to transmit their tax return information directly to the IRS and states through an electronic return originator or by using personal computer, modem and commercial tax preparation software (Form 1040 On-Line Filing Program).

If you can’t file your tax returns by the filing deadline because you don’t have the necessary information or you just put it off too long, you are entitled to an automatic 6-month extension to file, Form 4868, which must be filed before the original due date. Remember, the extension is granted only for FILING your return, not paying your taxes. If you do go on extension, do your best to make sure you have paid your estimated taxes no later than the due date, because any deficiency will be subject to interest, and possibly, penalties.

When you file your tax returns, they will be signed or electronically filed by you “under penalties for perjury,” so make sure your information is complete and accurate. There are stiff penalties for understating your income – not to mention jail time in certain circumstances -- and interest will accrue on any unpaid tax later found to be due. If you’re lucky enough to be entitled to a refund because too much tax was withheld, you should receive a check from the government within a few weeks or months after filing.