Grandpa Moneybags Lesson #9: Payroll Taxes
The following lesson in the Grandpa Moneybags series teaches kids about the value of taxes. Created by Hurlow Wealth Management Group, Grandpa Moneybags is a fictional character who shares lessons that parents and grandparents can use to introduce financial concepts.
Grandpa Moneybags Lesson #9: Payroll Taxes
By Theresa Claire, CFP®, CAP®
After getting off the bus from school on the Monday after his 14th birthday, Keith walked a few blocks to the closest fast-food restaurant and applied for a job. Nervously, he approached the counter and asked for an application.
"We have open interviews today," the jolly girl behind the register replied. "There's a sign-in sheet over there, and you can have a seat until the manager is ready for you, she added, pointing in the direction of the dining room.
"Keith Andersen," a middle-aged blonde woman announced.
"That's me," Keith replied, shaking her hand.
She introduced herself as Claudia Salomon and asked him to sit down.
"So tell me about yourself, Keith. What do you do for fun?"
The conversation proceeded as Keith told her about playing baseball, video games, and hanging out with friends. Then, she asked why he wanted the job and when he was available. Claudia offered Keith the job on the spot.
The following Friday, Keith proudly donned his new uniform and started orientation. His first task was ensuring the dining room was always clean. When diners finished their meals, he was there to bus their trays. He picked up trash for the next two weeks, wiped tables, moped floors, and cleaned the bathrooms every fifteen minutes. He anxiously awaited the receipt of his paycheck, which he mentally calculated would total $216 for the 24 hours he worked over two weeks at nine dollars per hour. However, he was disheartened to discover it was only $188.74.
"Hey Siri, call Grandpa Monebags," Keith commanded after putting wireless earbuds on for his walk home.
"Hi Keith, it's nice to hear from you." Charlie Kest said to his grandson.
"Grandpa, I just got my first paycheck, and they stole money from me!
They took out $13.39 for Social Security, $3.13 for Medicare Tax, and $10 for State Income Tax. What is that all about?"
Grandpa Moneybags chuckled on the other side of the line, "Well, well, well...first, congratulations on getting a job. Not very many people your age are willing and able to do that. Second, I sympathize with your situation. You had a different expectation of what you would receive and may feel disappointed. Is that right?"
"Yeah, I guess," Keith mumbled, then added emphatically, "It's just that I'm saving for a new PS5, and it's going to take longer."
"I can see how that would be frustrating." Charlie hesitated before continuing. "I know you don't want to hear this, young man, but taxes are a good thing. The deductions from your paycheck are called payroll taxes. They help the government provide public goods and services to benefit the community as a whole."
Keith was confused, "Public goods and services? What does that mean?"
Charlie patiently explained, "You see the lines for Social Security and Medicare taxes. Social Security taxes provide benefits for retired workers like me, and people with disabilities. Medicare taxes help offset medical expenses for people 65 or older or disabled. So when I go to the doctor, Medicare pays most of the bill.
Keith's eyes widened, "So my taxes are helping you? That's cool!"
Grandpa Moneybags smiled, "Yes, I agree, it is cool.
The other significant thing about taxes is that you're helping to pay for your school, police, fire, roads, and many other infrastructure and services around your state. So you are investing in your community. Your contribution to society helps make the world a better place. When you get older and make a little more money, you'll also pay Federal taxes which help pay for other programs. Does that help?"
"Yes, I didn't know I was helping you, Grandpa."
Keith hung up the phone, feeling much better about his taxes and grateful for his grandpa's wisdom. He realized that his job wasn't just about earning money for himself but also about contributing to the community's well-being. Keith went to bed that night with a newfound pride for the small difference he was making in the lives around him.