Taxes are fees that adults pay to the government from their money earned and purchases we make. The money collected from taxes is used to take care of public areas and services such as parks and roads. Taxes are paid to the local government like cities or counties and used for local needs like funding schools or community programs. Taxes paid to the federal government are used to fund national needs like social security, military, and government-funded healthcare programs.
Employees pay taxes annually, but freelancers and businesses pay taxes quarterly (every 3 months). Sales taxes on purchases are paid at the time of purchase or when a service is performed.
Let’s dive in to talk more about taxes and how they work!
What Are Taxes?
As an adult, there are many ways to earn or receive money, and most of them are taxed. Employees are taxed on their paychecks, investors are taxed based on capital gains (increases in the value of investments that is taxed when the investment is sold for profit), contract workers and freelancers are taxed on money they receive for performing services, and quarterly investment payouts (called dividends) are taxed at the end of the year.
Other taxes that are paid are on business income, property taxes are paid on houses and sometimes cars (depending on the tax laws where you live), and on food purchased from the grocery store or restaurants.
The amount of taxes paid is always a percentage of your income, investment, or purchase. The larger your paycheck or purchase amount, the higher percentage of taxes you will pay. The Internal Revenue Service (IRS) is the government organization that makes sure we pay our taxes and pay the right amount of taxes.
“Tax Day” is the deadline for taxes to be filed every year and is on or around April 15th unless the 15th falls on a weekend. So, if you hear about your parents talking about “Tax Day,” now you know!
Why Are Taxes Important?
Tax money collected from citizens pays for public goods and services used for the community’s good. Without taxes, we wouldn’t have things like:
- Emergency service providers like police, fire, and ambulances
- Public hospitals
- Highways, bridges, and tunnels
Paying taxes is the right thing to do, but it’s also the law. If taxes aren’t paid on time, or a payment plan isn’t set up with the IRS to get them paid, adults can face severe consequences from the government.
Taxes are necessary because it helps us maintain the communities we live in and makes sure that everyone has access to the services they need to live happy and healthy lives. Kids can go to the library and check out books or movies or sit in on classes that teach life skills. Kids and their families that may not have enough money to pay for food can receive government help to pay for food. Families that don’t have access to doctors or emergency room visits on their own can ask for help from community resources. These things can be life-changing for families, and it’s amazing that we have a society that offers assistance when needed.
Basics of How Taxes Work
Businesses keep a percentage of an adult or teen’s paycheck to pay taxes to the government on the employee’s behalf. Once a year, an employee files a tax return to balance the books on taxes owed. If the employee paid too much in taxes for that year, they are due a refund of taxes. If the employee didn’t pay enough in taxes for that year, the IRS will send a bill and a payment plan option to get the bill paid in a timely fashion.
There are 7 tax brackets that are determined by how much money an employee makes annually and whether or not they are married and have kids. The tax bracket you fall into will tell you how much money you owe in taxes. A tax professional can help adults file their taxes to do them properly and according to the law.
Some local governments put high taxes on items for sale to discourage adults from buying those products. For instance, some states have high taxes on tobacco products, alcohol, and sugary foods or drinks because these are unhealthy items and the government wants citizens to make healthy choices, so these items are charged heavy taxes.
How Your Parents Can Help You Learn About Taxes
The next time you are at the store with your parents, ask them if you can buy one item yourself that is a flat cost like $1 or $5 separately from what they are purchasing for themselves. Pay the money for the item and look at the receipt to see how much was added to the purchase cost in taxes. This is a great way to see how taxes really work!
Ask your parents if you can see how much they have paid in taxes on their current pay stub or if they are willing to discuss how income taxes work. This will help you prepare when you get your first job or start your first business because you will know and understand how taxes work.
Talk to your parents about how you can voice your opinion on taxes, tax rates, tax increases, and how tax dollars are used when you get old enough to vote. Go with your parents to the voting booth if it’s allowed in your region, or go to town/city hall meetings where the local tax policies are discussed. Listen to how adults voice their opinions and how they come to their conclusions.
- Taxes: Money charged to employees, freelancers, businesses, and on assets or purchases that are used to fund the government and social programs to maintain society.
- Employee: A person that works for a business and is paid a wage for their efforts.
- Freelancer: A person that works for themselves by providing services to individuals or businesses rather than working a job.
- Business: An organization that exists to provide goods or services in exchange for money.
- Social security: A government system that provides monetary stipends to members of society that are retired or disabled and no longer working.
- Sales tax: Also known as a consumption tax, this is applied to purchases of goods or services as a percentage of the sale.
- Capital gains tax: Taxes charged on the profit of sales on properties or investments like stocks.
- Dividends: Money paid every three months to investors who own stock in companies that offer this incentive.
- Property tax: Taxes paid on property owned. Examples include real estate and vehicles.
- Internal Revenue Service: An American government agency in charge of taxes and enforcing tax laws.
- Tax Day: The annual deadline for filing taxes before penalties are charged. Usually April 15th.
- Public goods and services: Have the ability to be used by everyone in society for free or at reduced cost because they are financed using public tax dollars.
- Tax rate: This is the percentage that an individual or business is taxed at.
- Tax policies: Decisions made by public servants on how much to charge for taxes and on what goods or services to tax on.
Books and Games to Learn More About Taxes As a Kid
Learning Resources Buy It Right Shopping Game, Math Game for Kids, 2-4 Players, Ages 5+. Set prices, buy and sell items in this board game that simulates a live shopping environment. This helps teach currency and money management while adding in taxes to show kids how shopping works in real life.
Winning Moves Games Pay Day, The Classic Edition. Originally developed in 1975 and released to the public, this game has been played by generations and built positive money management habits for decades. This game is two laps around the board and takes roughly 15 minutes to play, with the goal being to have the most money at the end of gameplay.
Dave Ramsey’s ACT Your Wage! Board Game. All players are assigned a wage at the beginning of the game and debts that they have to pay off in order to win the game. Basic financial skills are taught like earning, spending, and giving as well as taxes, debt, and increasing earnings.
Financial Peace Junior Kit: Teaching Kids How to Win With Money. This is a kit that kids and parents can use together as a team to teach basic financial concepts in real life for earning, spending, giving, taxes, and debt with ways to avoid debt as an adult. Kids can participate in fun activities like coloring pages and interactive stories with colorful stickers to use on charts that celebrate each activity completed by the child.
Lakeshore Allowance Game. Receive your allowance every week from your parents in this game, but you may face “taxes” in the form of missed homework assignments or a library fine that cause you to have less allowance for that week. The aim of the game is to be the first to reach $20 saved!