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

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."