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Helping students understand and budget for taxes
August 09, 2017
It's often called one of the sure things in life, but for many young people receiving their first paycheck, it is a surprise – and probably not a pleasant one.
It is the withholding from their paycheck.
When creating a budget, how much should be included for withholding? The amount can vary from person-to-person, depending on a number of factors, and it is certainly something to be discussed with a qualified tax advisor.
Mapping Your Future does include a withholding amount in the budget calculator. The reason we include the withholding is so that those who use our calculator, including many high school and college students, will be aware of and plan for withholding.
The amount we use in the budget calculator is 28 percent. Young taxpayers may not have withholdings as high as 28 percent due to lower incomes or other factors. However, as in most things in life, it's better to be conservative and estimate a higher amount for withholding than to underestimate.
Twenty-eight percent withholding allows enough in the budget for all taxes – federal, state, and local. Twenty-eight percent is also the rate for backup withholding, and some experts recommend that independent contractors should set aside about 25-30 percent of their income for taxes.
When working with your students to plan both in-school and after-graduation budgets, we encourage you to use Mapping Your Future's budget calculator, as well as our 8 steps to creating a budget.