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Course: Financial Literacy > Unit 10
Lesson 1: What are taxes?Real world: A Taxing Time
Picture a world in which Tax Day was... every day. Because for some of us, it is!
Created by David Rheinstrom and Elvira Valdez.
Want to join the conversation?
- If they have all the information already, why doesn't the IRS fill in at least the basic parts of our taxes for us? Isn't the existing system like the credit card company sending you a blank piece of paper to fill in at the end of each month?(1 vote)
- That's how it works in Taiwan, where everything is up to date. The USA is behind the times, and will some day catch up to the modern nations of the world.(4 votes)
- the credit card company sending you a blank piece of paper to fill in at the end of each month(1 vote)
Video transcript
- [Narrator] 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, knock it off! 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 SleepyTime Products Incorporated, a fictitious business. To be clear, it does not exist. But if it did, SleepyTime
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 SleepyTime Products, each of whom will showcase a
different way of paying taxes. Keisha is a product engineer. She researches new mattress technologies. - [Keisha] Squishability
of the mattress topper increases by 14% when we
use the reticulated foam. Fascinating! - [Narrator] Keisha is
a full-time employee. Over here in the sales
department is Carlos. - [Customer] We're big fans of this bed. - I'm so glad you feel that way. We're very proud of these products. - [Customer] Oh, Carlos,
what kind of bed do you use? - What's that? - [Customer] What bed do you use? - Oh, I sleep on the G20 Alpha. - [Customer] Oh, with the cooling wings! - Yeah, with the cooling wings, exactly. - [Narrator] Carlos is not a
salaried, full-time employee. He is a contractor for SleepyTime. Keisha and Carlos make
the same amount of income, but their tax arrangements
are very different. When Keisha started at SleepyTime she was given an I-9 Form and a W-4 Form. But Carlos, Carlos the
contractor, received only a W-9. Keisha's I-9 and Carlos's
W-9 have the same function. They tell your employer that
your eligible to work in the US 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 Keisha
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 US Treasury to do
her share of paying for roads and bridges and 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 gonna 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. - [Narrator] Do you see? For Keisha, Tax Day occurs every payday. As a contractor Carlos
doesn't get the same perks or benefits as Keisha 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 SleepyTime Products'
Accounting Department isn't doing it for him the
way they are for Keisha. - Lucky me. - [Narrator] 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. - [Narrator] Now, even
though Carlos pays his taxes once a quarter and Keisha's
come out of her paycheck automatically every two weeks, when January comes around
SleepyTime Products sends out forms that detail
how much money Carlos and Keisha made in the previous tax year. - Hello, what's this? - [Narrator] Carlos's 1099-MISC shows him how much SleepyTime Products
paid him this tax year with no deductions. - Ah, got it. - [Narrator] Whereas Keisha's
W-2 shows her not only how much SleepyTime 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. - [Narrator] Keisha 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. - [Narrator] 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 Keisha and Carlos make preparations. Keisha 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. - [Narrator] Keisha 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 US 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. - Hmm, so let's subtract
my mortgage interest from my taxable income. Hey, all right, that's
not as bad as I thought. - [Narrator] No, indeed Carlos. With a little planning and forethought there's no need to fear the taxman. 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. (mellow music)