Module 1 Lesson 4 Narrative
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Financial Education for College Access and Success
Personal Finance: Module 1 Lesson 4
Tolls Along the Way
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Taxes, after all, are dues that we pay for the privileges
of membership in an organized society.
Franklin D. Roosevelt, 32nd President
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What are Taxes?
Taxes are required payments of money to the government. Taxes are collected by the government on products,
income or activities in order to create a source of revenue (income for the government). This revenue source
allows the government to then provide goods and services for its citizens. We, as citizens, all benefit from the
goods and services that are provided and paid for by the taxes collected by the government.
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Background on Taxes (and the IRS)
A system for collecting taxes from citizens and businesses to fund government activities was present in some form
in most ancient civilizations, including ancient Egypt and Greece. Even the Mayans had a system of taxation. Fast
forward to the mid-1700’s to see Great Britain attempting to collect taxes from the American colonists for certain
products that had to be imported into the colonies, such as tea, molasses, glass, and paper. Because the colonists
believed they should have more say in how this tax system was administered, they started to push back or revolt
against these taxes. The colonist’s actions eventually led to the Revolutionary War, also known as the American
War of Independence, which started in 1775 and ending in 1783 when the United States of America was finally
recognized as a sovereign and independent nation.
Actually taxing income in the United States really began gaining traction in the 19th century. In 1862, Congress
enacted the first US income tax law and created the “Bureau of Internal Revenue” basically to collect money to pay
for the Civil War effort. However, it was in 1913 that the 16th Amendment was passed giving Congress the legal
and official power to impose a tax on income. Eventually, the Bureau of Internal Revenue name was changed to
the Internal Revenue Service which we now refer to as the IRS.
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Why do we pay taxes?
Were the roads that you traveled on today paved? Do you know anyone who has been in an emergency situation
and had to call 9-1-1? Nearly everyone has or will pay taxes at some point in their lifetime! We pay these taxes
because some services are necessary and essential. If individual citizens only paid for the public services they
actually use (like roads or schools), there might not be enough money to provide the service and then no one could
benefit. Governments use our taxes to support Social Security, the environment, our military, public schools, public
safety and also provide money for student financial aid for college in the form of grant and loans…the list is a long
one.
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Module 1 Lesson 4 Narrative
Links and Activities
Why Pay Taxes?
This link offers a series of activities and lessons created by the IRS to explain the benefits of paying taxes.
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US Tax Systems
Also, we have to consider those persons who have a lesser or limited ability to pay. Because in the US, our income
is taxed based on the individual’s "ability to pay”, as we earn more money, we pay more taxes. And the opposite is
also true, if we earn a smaller income, we pay less income tax. This type of tax system is known as a progressive
tax system. However, a tax system that places a greater tax burden on those with less income is called a
regressive tax system. This is because the dollar amount of the regressive tax stays the same for everyone, but
once paid, ends up taking a larger share or percentage from those with the lesser income. A sales tax like we have
in the US is a type of regressive tax.
While few people enjoy paying taxes, everyone benefits from having good schools, safe roads, clean water, and
other public services. In the end, taxes improve our overall quality of life for each of us.
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Who collects These Taxes?
The United States government is made up of federal, state and local (county and city) governments. Each
jurisdiction operates for the most part, independently, with each level of government requiring their own set of
taxes to fund their operations.
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Federal Taxes
At the federal level revenue is created because employers are required by law to withhold money from each
employee paycheck for income tax, Social Security tax and Medicare tax. Without regular withholdings
employees might have difficulty saving enough money to pay their taxes at the end of the year. Each pay period,
these taxes, along with the employee’s share of employee benefit payments (like health insurance), are subtracted
out of the employee’s total earnings (also called gross income). The money remaining after these taxes and benefit
payments are subtracted is call net pay or take-home pay (may also referred to as disposable income). To help
you recall the difference between gross pay and net pay, remember the phrase “gross is greater, net is not”!
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Federal Income Tax and Payroll Tax Withholdings
Federal Income Tax
One of the largest amounts deducted from your paycheck, federal income taxes are withheld according to the
employee’s income and number of allowances (persons claimed on your income taxes as dependents). The
employee sets up the number of allowances by filling out a Form W-4 Employee Withholding Allowance
Certificate when they are first hired for a job. The Form W-4 includes a worksheet to help you calculate your
allowances. Because these allowances, reduce the amount of federal income tax withheld, the more allowances
you claim the less money is withheld.
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Module 1 Lesson 4 Narrative
Links and Activities
Form W-4 Employee Withholding Allowance Certificate (The IRS Form W-4)
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Payroll Tax
Social Security Tax
The Internal Revenue Service (IRS) explains that the Social Security tax “provides income benefits for retired
workers and their dependents as well as for the disabled and their dependents”. The Social Security tax is also
referred to as the FICA (Federal Insurance Contributions Act) tax. The percentage of your earnings the employer is
required to withhold each pay period can change from year to year and is determined by the federal government.
In addition, your employer is also required to “match” or contribute the exact same amount that you do and send
it to the IRS.
Medicare Tax
Medicare taxes are deducted to pay for health insurance to offset the cost of medical care for retired persons (and
their spouses) eligible to receive Social Security benefits. And similar to the Social Security tax, your employer also
contributes the same exact same amount of Medicare tax and sends it to the IRS.
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Here is an example of a paycheck stub.
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Links and Activities
These links and activities help you understand more about withholdings and other payroll deductions.
Payroll Taxes and Federal Income Tax Withholding
This link offers a series of lessons and activities created by the IRS to explain the taxes deducted from a paycheck
and the purpose of a Form W-4.
What Ate My Paycheck?
This is a lesson plan that includes practice in percentages and pie charts.
Read and Interpret Pay Stubs
This lesson plan (on pages 5-7) helps students understand paystub and deductions.
Understanding My Pay Stub
This worksheet helps students practice interpreting payroll deductions.
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Filing Income Taxes & Tax Forms
When a company hires you for a job, they are also required to start deducting income taxes from your paycheck.
The amount of money withheld from your paycheck for federal income taxes during the previous calendar year is
reported on a W-2 Wage and Tax Statement. Since the amount of taxes that are withheld may not be exactly the
same as the amount you owe the IRS, if you overpay, you may qualify for a refund! However, if not enough money
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Module 1 Lesson 4 Narrative
was withheld, you end up owing an additional sum to the IRS. You will need to complete a tax return to find out—
and the receipt of the W-2 is the first step in this process.
By January 31st of every year, each employer is required to send their employees a W-2 form. This W-2 form also
reports all taxable income received by the employee for the previous year. Taxable income is the amount of
income that an individual must pay their share of taxes on—based on tax rates established by the government. It
is important for the employee to understand that payroll deductions you set up to go to a tax-deferred retirement
plan like a 401(k) will be subtracted and will not be included in taxable income.
Links and Activities
Payroll Deductions and Earning Statements
This lesson plan has activities to help students interpret a W-2 and calculate net pay while reinforcing basic math
skills.
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Calculating the Taxes Owed
As soon as you receive your W-2 form, the IRS expects you to fill out an income tax return and calculate the correct
amount of federal income tax that is owed or refunded and file it (electronically or via mail) by the deadline which
usually falls on April 15.
Links and Activities
Using Your W-2 to File Your 1040EZ
This is a simulated lesson to explain the basics of completing a tax return.
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There are three versions of tax return forms that may be filed, depending on your individual or family
circumstances. The 1040 is the official government form required to report your income and calculate your federal
income tax amount. However, a simpler form, often used by teenagers, is the one-page 1040EZ which requires
only very basic information. Your situation may require that you complete a 1040A, a two-page form, which allows
for more for deductions and income.
Links and Activities
The Final Step: Filing Taxes
This lesson plan includes activities that reinforce completing and filing a tax return.
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State Income Taxes
Most, but not all states have a state income tax which is deducted in a similar manner to that of federal income
taxes (the more allowances, the less the amount of tax withheld). Like federal income tax, state income tax starts
with the taxable income reported on your Form W-2. However, state taxes must be filed on the specific tax form
that is designated and required by the state you live in. Once completed, it is then forwarded to your state’s
Department of Revenue, by the deadline that is required in your state. State income taxes fund many of the same
types of programs and projects as federal taxes like roads, education and public safety.
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Module 1 Lesson 4 Narrative
State, City and County Taxes?
Some of the most common types of city and county taxes include property, sales and excise.
Property Taxes are paid by people who own property, usually land, a home, or other real estate. These taxes are
often collected by the state and county to help fund their budgets for education, road-building and maintenance,
water and waste management systems, etc.
Transaction Taxes are taxes on goods and services. Two common forms of transaction taxes are sales tax and
excise tax. Sales Tax – charged when customers make purchases. The tax is a percentage of the sales price — buy
less stuff, pay less tax. Excise Tax – charged on the purchase of specific goods such as motor fuel, cigarettes and
alcohol and are usually included in the price of the item. Some items that have an excise tax are also charged a
sales tax as well.
Links and Activities
Federal/State/Local Taxes
This is a series of activities and lessons created by the IRS to explain taxes are a source of revenue for
governments.
Slide 19
Now that we’ve talked about what taxes are, the types of taxes and the reason for taxes; let’s revisit the Franklin
D. Roosevelt quote.
Taxes, after all, are dues that we pay for the privileges
of membership in an organized society.
Franklin D. Roosevelt, 32nd President
What do you think he meant by an organized society? Is it possible that if it weren’t for taxes there would be no
free public education? Your parents would have to pay to send you to school or you would have to be homeschooled. What would you do with your trash? What about the people who would let their trash pile up and make
the neighborhood look and smell bad. Who would build roads and bridges? Without adequate roads, bridges and
interstates, it would take a very long time to travel from one place to another.
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