By Ray’Chel Wilson
Jay-Z once rapped, “It’s gross what I net.” Great line! However, how many of us don’t know what that means? Today, we introduce the topic of taxes.
Taxes are financial charges placed on individuals, businesses, and other entities by the government. They fund public services and programs. When we pay taxes, the government can use the money to help people in our community. The government uses our tax dollars to pay for things such as schools, roads, and even the police and firefighters who keep us safe. Just like we have to pay for things we want or need, the government needs money to do its job too.
The government takes taxes from people’s paychecks, which means a certain amount of money is taken out of what you earn.
People also have to file a tax form every year which is similar to a report card that tells the government how much money you made and how much tax you owe. However, some people might not owe any taxes because they don’t make a lot of money.
Want to best prepare for tax season? Here’s how you can plan for taxes, based on your employment status:
For our side hustlers:
Keep track of your income earned using an accounting management software like WaveApps. Opening a business account with a bank or local credit union (which are often more community-focused than banks) will help you start this organization process.
Keep track of your expenses. Things like materials you used, equipment you bought, or money you spent to tell people about your side job can be written off as a tax deduction, meaning you pay fewer taxes for having business expenses. It’s like when your child gets a toy at the store and they have a coupon, you don’t have to pay the full price, you can use the coupon and pay less. It’s the same thing with taxes—you might be able to pay less because of the money you spent doing your side job.
Keep track of your calendar. Taxes are typically due on April 15 of each year, with financial penalties if you submit late. Begin your tax reporting process early!
For those employed:
When you have a job and get paid, your employer takes out money from your paycheck to pay taxes to the government. This is called withholding taxes. Your employer uses a form called W-4 to know how much money to take out.
At the end of the year, your boss gives you a form called a W-2 that shows how much money you made and how much tax was taken out of your paycheck. You need this form to fill out your tax returns.
It’s important to make sure all the information on your W-4 and W-2 forms is correct; including your name, address, and social security number, otherwise, it might cause a problem when you file your taxes.
You can also take off from your taxes some of the money you spent on things such as donations given to charity or money paid for state taxes. These are called deductions. In addition, there are also special discounts you can receive on your taxes called credits.
If you have questions about taxes or need help filling out your tax forms, you can ask an experienced adult you trust or a tax expert such as an accountant.
A tax refund, also known as a “refund check,” occurs when the government gives back money to individuals who have paid too much in taxes. The returned amount is the excess money that was paid and is not considered additional income. The refund check is the government returning money that it had been holding on to, similar to how a savings account holds onto money.
It’s important to remember that taxes can be complicated, and if you’ve never completed a tax return before, you may need help understanding how they work and how much you owe. When in doubt, seek help through an online service such as TurboTax.com or a tax expert like an accountant.
Stay tuned for the next article to always better your money moves.
Affirm: The more I manage my money, the more it will flow to me.
Ray’Chel Wilson, Certified Financial Education Instructor®, is the CEO of Raise the Bar Investments, and an advisory board member of the Phe’Be Foundation, fighting financial illiteracy across age ranges.