yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

A Taxing Time | Teacher Resources | Financial Literacy | Khan Academy


4m read
·Nov 10, 2024

If I say the phrase "tax season" to you, you likely imagine a period in spring leading up to the middle of April. This is, after all, when Tax Day falls on or around April the 15th. However, what if I were to tell you that tax season was every season? What if I were to let slip that every day, even today, is tax day? How would that make you feel? Unsettled? Alarmed?

Well, not to worry. Those taxes paid for our roads, our hospitals, and other essential services. They also paid for my high school, and I turned out just fine, thank you very much. The point is, we pay taxes all year long: sales tax, gas tax, and even income tax. Picture in your mind a business. No, never mind; this is a video format. We'll do it together.

Imagine Sleepy Time Products Incorporated, a fictitious business, to be clear. It does not exist, but if it did, Sleepy Time would make mattresses, pillows, hair bonnets, and eye masks—a cozy place, a comfy place. I would like to introduce you to two workers at Sleepy Time Products, each of whom will showcase a different way of paying taxes. Kesha is a product engineer; she researches new mattress technologies. Squishability of the mattress topper increases by 14% when we use the reticulated foam. Fascinating!

Kha is a full-time employee. Over here in the sales department is Carlos. "I'm so glad you feel that way. We're very proud of these products." What's that? "Oh, I sleep on the G20 Alpha, yeah, with the cooling wings." Exactly. Carlos is not a salaried full-time employee; he is a contractor for Sleepy Time. Kesha and Carlos make the same amount of income, but their tax arrangements are very different.

When Kesha started at Sleepy Time, she was given an I-9 form and a W-4 form. But Carlos? Carlos the contractor received only a W-9. Kesha's I-9 and Carlos's W-9 have the same function; they tell your employer that you're eligible to work in the U.S. so they can tell the IRS how much they paid you. The only difference is that the I-9 is for employees and the W-9 is for contractors.

Picture a world in which taxes are subtracted from the paycheck of the American worker before that paycheck even hits their bank account. Picture a world in which you spend all year paying income taxes a little at a time so that by year's end, you owe nothing at all. Submitted for your approval: Internal Revenue Service Form W-4. The W-4 form that Kesha received helps her figure out how much of her paycheck should be withheld for income taxes—how much of each paycheck should she send right to the U.S. Treasury to do her share of paying for roads, bridges, schools, and drinking water.

The more she withholds now, the less she'll have to pay later, but if she overpays and withholds more than she owes in taxes, she'll get more back later as a refund. "Okay, I've got a partner and kid at home. I'm not going to withhold as much income for taxes because of the deductions I get for being married and having a child. More take-home pay, it is."

Do you see? For Kesha, tax day occurs every payday. As a contractor, Carlos doesn't get the same perks or benefits as Kesha does as a full-time employee, like employer-provided healthcare or contributions to a retirement account. He has to do his own tax withholding because Sleepy Time Products' accounting department isn't doing it for him the way they are for Kesha. "Lucky me!"

Carlos has to do his own withholding, combining his various sources of income to pay estimated quarterly taxes. Every three months, he sends checks to the tax authorities in his state and to the federal government, paying a percentage based on the amount of money he expects to make that year. Figuring that out was relatively easy; the IRS has a worksheet: 1040-ES.

Now, even though Carlos pays his taxes once a quarter and Kesha's come out of her paycheck automatically every two weeks, when January comes around, Sleepy Time Products sends out forms that detail how much money Carlos and Kesha made in the previous tax year. "Hello, what's this?" Carlos's 1099-MISC shows him how much Sleepy Time Products paid him this tax year with no deductions. "Ah, got it."

Whereas Kesha's W-2 shows her not only how much Sleepy Time Products paid her, but also how much of her income was withheld as taxes. "Woo, they had better name a train station after me or something!" Kesha and her partner rent their home, whereas Carlos is a homeowner. So Carlos gets another tax form from his mortgage lender, Form 1098, showing how much he paid in interest on his mortgage this year. "Woo, they better name a bank branch after me or something!"

Carlos is in luck; however, the interest on his mortgage payment is deductible. The 1098 lets him subtract that number from his overall taxable income, thus lowering his tax burden. As the filing deadline of April 15th approaches, Kesha and Carlos make preparations. Kesha runs the numbers; she's paid enough with her withholding throughout the year that she'll actually get a refund from the federal government. "Huh, I guess I overpaid. Looks like the orthodontist is finally getting that last payment!"

Kesha has effectively been paying taxes all year long. Because of her elections on her W-4 form, money is subtracted from each paycheck and sent to the U.S. Treasury. By the time April rolls around, she's all settled up. However, Carlos had no withholding as a contractor, and he had a few more side gigs than he predicted that weren't covered by his estimated quarterly payments. Therefore, he owes money at the end of the year. "Hm, so let's subtract my mortgage interest from my taxable income. Hey, all right! That's not as bad as I thought."

No, indeed. Carlos, with a little planning and forethought, there's no need to fear the tax man. "Stride confidently into tomorrow in the knowledge that tomorrow is tax day, and so is the day after that, and the day after that, and the day after that. But don't worry, it's all going to be okay."

More Articles

View All
Adding and subtracting fractions with negatives | 7th grade | Khan Academy
Let’s say we wanted to figure out what (3 \frac{7}{3}) minus (-\frac{7}{3}) minus (\frac{11}{3}) is. Pause this video and see if you can have a go at it before we do it together. All right, now let’s work on this together. You might be tempted to deal wi…
Looking for Killer Whales 26 Years After the Exxon Valdez Oil Spill (Part 1) | National Geographic
In 1989, the largest oil spill in US history destroyed a remote Alaskan wilderness. That was a long time ago. Most people say the sound is back to normal, except for this man. He’s been studying killer whales caught up in the spill. He believes they’re st…
Safari Live - Day 238 | National Geographic
This program features live coverage of an African safari and may include animal kills and caucuses. Viewer discretion is advised. This is why the inclement ride is such a firm favorite. It’s Quito. [Music] It just looks ready for a fight. [Music] This is…
Estimating derivatives | Derivatives introduction | AP Calculus AB | Khan Academy
[Instructor] So we’re told that this table gives select values of the differentiable function F. So it gives us the value of the function at a few values for X, in particular, five different values for X, and it tells us what the corresponding f(x) is. …
Charlie Munger Warns of High Inflation Consequences
We’ve done something pretty extreme and we don’t know how bad the troubles will be, whether we’re going to be like Japan or something a lot worse. I think we do know we’re flirting with serious trouble. Just yesterday, the Daily Journal Corporation held …
Making a house out of mud bricks. (Real life minecraft) - Smarter Every Day 18
Here are Smarter Every Day, we’ve decided to change the format and make learning very very serious. And by serious I mean… [Thump, splash] - Seriously awesome! [Crowd yells] [Crowd laughs] (Destin) Alright, today we’re gonna learn about mud in Africa. Th…