Navigating the Transition to the Workforce
The moment a teenager secures their first job marks a significant shift in the household dynamic. It changes their status from a pure consumer of family resources to a producer of income. While this transition is often celebrated for the character development and responsibility it fosters, it also introduces specific financial and administrative tasks that many young people are encountering for the first time.
For parents, this is a critical window for education. The habits formed during these initial months of employment often persist well into adulthood. Below are the primary financial components you need to address to ensure your child understands the mechanics of their new income.
What Tax Forms Does a Teenager Need for a First Job?
When a minor begins formal employment, they will be required to complete specific federal documents. Understanding these forms prevents confusion when the first paycheck arrives.
Form I-9: This verifies the identity and employment authorization of individuals hired for employment in the United States. Your child will need to provide acceptable documents, such as a passport or a combination of a driver’s license (or ID card) and a Social Security card.
Form W-4: This document tells the employer how much federal income tax to withhold from the employee's pay.
The W-4 often causes confusion. Since the Tax Cuts and Jobs Act changed the layout of the form, we no longer use "allowances." Instead, the form asks for specific dollar amounts regarding credits and deductions.
For many teenagers working part-time, their total annual income may fall below the standard deduction. If they do not expect to owe any federal tax, they may be able to write "Exempt" on their W-4, provided they meet specific IRS criteria. This prevents federal income tax from being withheld from their paycheck, maximizing their take-home pay. However, they will still see deductions for Social Security and Medicare (FICA taxes), which are generally mandatory.
How Should a Teenager Budget Their First Paycheck?
The first paycheck is often a shock to new workers because the net pay is lower than the gross pay they calculated in their heads. Once you explain where the difference went (taxes), the next step is determining where the remaining money goes.
We suggest establishing a structured approach immediately. If a teenager gets used to spending 100% of their income, breaking that habit later becomes difficult. A widely accepted framework for beginners is the 50/30/20 rule, though for a teen with fewer bills, you might flip the ratios to prioritize saving.
Savings (50%): Since teens typically have low overhead (housing and food are often provided by you), they have a unique ability to save a high percentage of their income.
Discretionary Spending (30%): This funds their social activities, hobbies, or specific consumer goods they want.
Giving (20%): Continuing the practice of charitable giving helps maintain perspective on the value of money within the community.
Why Should a Teenager Open a Roth IRA?
One of the most powerful financial concepts a young person can learn is the time value of money. Because your child now has "earned income," they are eligible to contribute to a Roth IRA.
A Roth IRA is a retirement account where you pay taxes on money going in, but all future withdrawals after age 59½ are tax-free.
Eligibility: They can contribute up to the annual limit or the total amount of their earned income, whichever is lower.
Impact: Because the money has decades to grow, even small contributions made in the teenage years can result in significant accumulation due to compounding.
Flexibility: Unlike other retirement accounts, contributions (but not earnings) to a Roth IRA can be withdrawn at any time without penalty, which sometimes makes the account feel less intimidating to a young saver.
This is an opportunity to discuss the difference between "saving" (putting money aside) and "investing" (using money to generate more money).
Who Is Responsible for Filing the Teen’s Taxes?
Technically, the child is responsible for their own tax return, but as the parent, you will likely oversee the process.
Even if your child earns less than the standard deduction threshold and is not required to file a federal tax return, it is often beneficial to file anyway. If they had federal income tax withheld from their paychecks but owe zero tax, filing a return is the only way to receive a refund of that money.
Additionally, you must ensure that they do not claim themselves as independent on their tax return if you are still claiming them as a dependent on yours. This is a common error that can lead to processing delays with the IRS.
How Do Joint Bank Accounts Work for Minors?
Most financial institutions require a parent or guardian to be a joint owner on bank accounts for minors. This arrangement is often called a custodial account or a joint account.
Visibility: This allows you to monitor transaction history and help them correct mistakes, such as overdrafts or forgotten subscriptions.
Transferability: It facilitates easy transfers if you are subsidizing certain expenses or paying them for household commissions.
Legal Standing: Be aware that money in a joint account is legally accessible by both parties.
Summary of Action Items
To streamline this process, here is a checklist to review with your child before their first day:
Gather Documents: Locate their Social Security card and ID for the I-9.
Review the W-4: specific attention to the "Exempt" status requirements.
Set the Split: Agree on what percentage of the paycheck goes to savings versus spending before the first deposit hits.
Open the Accounts: Set up a checking account for direct deposit and a Roth IRA if you choose to utilize that strategy.
Entering the workforce is a major step toward independence. By focusing on the logistics and the strategy behind the income, rather than just the income itself, you help your child build a sophisticated relationship with finance that will serve them for the rest of their lives.
Disclaimer: This blog post is for informational and educational purposes only and does not constitute legal, tax, or investment advice. Consult with qualified professionals for advice specific to your situation. Kevin Lynch Sr. and Westminster Wealth Management are not attorneys or tax advisors.