This is the second blog in a four-part series, designed to help you engage your adult children in conversations about financial planning. Read all of our entries in the "Road to financial independence" series:

Part 1: Budgeting  

Part 3: Investing 101 

Part 4: Helping children on their financial journey 

Continuing our first blog’s theme — that adulthood is more of a journey than a destination — we recognize and celebrate a major milestone: your child’s first job (or second, or third). Your child’s accomplishment is also your opportunity to rejoice in your child’s growing independence, both personal and financial.   

As with any new endeavor, your child may feel bewildered by the prospect of completing the new-hire paperwork and benefit selections and may be looking for a roadmap. Consider sharing the following tips and information with your child to clarify the various tax and benefit elections your child may be offered. 

Where did my paycheck go?  Ah, taxes… 

Tax withholdings 

Known as the Form W-4 and titled “Employee’s Withholding Certificate,” this form tells your employer how much to set aside from each paycheck to cover your estimated federal income taxes. While you’ll still be responsible for filing an income tax return every April, accurately filling out the W-4 can help reduce the chance that you’ll overpay your taxes throughout the year or owe a large balance come April. Because income tax rates vary based on the taxpayer’s family structure, pay rate and the availability of deductions, taxation is not one-size-fits-all: the W-4 helps customize your tax withholdings.  

Key information that the IRS requests on a Form W-4 to determine your tax withholding includes: 

• Personal information, including your social security number and your marital status 
• Your expected salary and additional household income (e.g., from a spouse or if you hold more than one job)  
• Number of qualifying children or other dependents in your home 
• Expected tax deductions that may help offset your taxes (e.g., mortgage interest deductions, charitable deductions, etc.) 

Keep in mind that you may have to fill out a state-specific version of this form as well, unless you live and work in one of the states that don’t levy a state income tax. 

Other paycheck withholdings 

On top of your income tax withholdings, you will typically see the following taxes and deductions taken directly from your paycheck each pay period: 

• Federal Insurance Contributions Act (“FICA”): If you see this acronym on your paystub, it’s a combination of OASDI and Medicare taxes (see the bullets below).  
• Old-Age, Survivors, and Disability Insurance (“OASDI”): This amount is your contribution to the social security system. Contributions are mandatory for virtually all working Americans and the contributed amount is calculated as 6.2% of your wages (with the maximum annual contribution capped at $9,932.50). Your employer also is required to make a matching contribution, which is not taxable to you.   
• Medicare: The Medicare tax rate is 1.45% of your “Medicare taxable wages” (that is, your wages after some deductions are taken out). You may also be liable for an additional Medicare tax of 0.9% if your income is above certain thresholds. Your employer also is required to make a matching contribution.  
• Family leave insurance: Several states and Washington, D.C. have mandatory paid family leave insurance programs. While the costs vary, if your employer is located in one of these states or if you work in a state that has a mandatory program, you may be required to contribute.    
• State disability insurance: A handful of states also have mandatory disability insurance requirements to replace wages for people who are ill, injured or otherwise unable to work. The benefits and costs vary by state.  
• Deductions for benefits: You are likely to see deductions in your paycheck for costs associated with employer-provided benefits, including health insurance, retirement contributions, and other benefits (all described below). 

Getting paid 

If you work for an established business, you will most likely be offered the option of having your paycheck deposited directly into a checking or savings account. To set up this “direct deposit” option, you’ll be asked to fill out a form with your bank account and routing numbers, both of which you can find on a standard check or in your online banking app. On pay day, the money will show up in your account as a credit. If you’re working for a family or an individual, direct deposit may not be available; you could be paid via cash, check or electronic transfer.  

Regardless of payment method, you should receive a paystub reflecting your gross pay (that is, your pay before tax withholdings and other deductions) and your net pay (the amount you actually received).  

Your (wise) choice: selecting benefits 

Retirement savings elections  

If your company offers a retirement savings plan — like a 401(k), Profit Sharing Plan, 403(b) or the like — this is your opportunity to pay your future self by setting aside money for retirement. While retirement may seem like a long way away, the best time to start saving is now. Plus, the amounts you set aside today might help you reduce your current income tax liabilities. 

Consider a few of the retirement options your employer may offer:   

1. Pre-tax plans 

• If your employer offers a traditional retirement plan — usually a 401(k) or a 403(b) (named for the sections of the tax code where they are described) — you’ll need to choose how much of your paycheck you’d like to contribute and how you’d like it to be invested. As of 2023, the IRS allows an employee to save up to $22,500 in this type of tax-deferred employee retirement account (with an additional $7,500 “catch up” contribution allowed if you are over 50 years old).  
• Money contributed to this type of retirement account comes out of your paycheck pre-tax. Keep in mind, however, that you’ll pay income taxes when you withdraw this money (and its growth) in retirement.  

• Some employers also add to their employees’ retirement accounts on a matching or non-matching basis. Even if you find it difficult to part with the dollars you’ve just begun earning to save for retirement, consider contributing enough each year to qualify for a matching employer contribution, if it’s offered. Otherwise, you’re leaving free money on the table.  

2. Post-tax plans 

• Your employer’s retirement plan may also offer a Roth 401(k) or Roth 403(b) retirement plan. While you’re still limited to a total contribution of $22,500 (for 2023), you can decide how to allocate that contribution between the traditional options outlined above and Roth options. 
• With a Roth plan, your contributions are taxed today, but will grow income-tax free until you’re ready to access it. Even the earnings inside a Roth can be distributed tax-free, assuming you follow certain rules.    
• Some employers also allow workers to make post-tax contributions to a regular 401(k), but this is an unusual choice that you should consider only after maximizing your other options.  

Health insurance 

If you are under 26, you may have the option of staying on your parents’ health insurance plan. For everyone else, you may have to make some choices about how to plan for medical expenses. If you are covered under a spouse or partner’s plan, you both should review the offerings at each workplace and decide whether it makes sense to enroll in separate plans or to pick one or the other for both of you to use.  

Items to consider when evaluating the offerings:  

• Are your current doctors in network? 
• Do you have the option to choose a high-deductible plan and enroll in a health savings account (HSA)? If you are generally in good health, this can be a great way to reduce your spending and/or save money for future health expenses.     
• If offered, do you want to enroll in dental or vision insurance? Keep in mind that your primary health insurance may offer limited dental or vision care, but if that is not sufficient for your needs,  additional dental or vision coverage may make sense. 
• Does your company offer a flexible spending account where you can contribute money, pre-tax, to help cover eligible medical expenses not otherwise paid for by insurance (e.g. co-pays, deductibles, pharmacy expenses)? Does your employer contribute to this account?  

Keep in mind that most employers allow you to change your health insurance benefits each year during a re-enrollment period (usually toward the end of the calendar year, but not always) to allow you to switch plans as your needs change. Certain life events can also give you the chance to change your coverage elections.  

 
Dependent care 

Some employers may offer a dependent care flexible savings account (aka “dependent care FSA”), which allows you to set aside money from your paycheck on a pre-tax basis to help pay for dependent care services, such as daycare, preschool, summer day camps, before- or after-school programs or adult day care. This is a great option if you have expenses related to the care of younger children (under the age of 13) or a dependent adult living in your home who needs care. Make sure to read the fine print to understand which expenses are covered as any amounts left in this account at the end of year are forfeited.    

Life and disability insurance  

• Life insurance:   
  • Your company may provide a small amount of life insurance coverage at no cost to you. If you need additional life insurance, or if your spouse needs insurance, you may be able to get it through your employer and pay the premiums directly from your paycheck.   
  • Keep in mind that if you are healthy, you may be able to get additional insurance for a better price by seeking insurance outside of an employer plan. Additionally, you won’t lose your private insurance if you end up changing your employer down the road.   
• Disability insurance:   
  • Some small amount (short-term, long-term, or both) may be included in your benefit plan at no cost to you with an option to increase the benefit coverage for an additional charge. Although becoming disabled may seem far-fetched, it’s important to consider this type of insurance to help protect yourself and your family should you be unable to work for a short or extended period of time.   
  • As with life insurance, it may be more cost effective to purchase supplemental disability insurance outside of your company’s offering.   

Conclusion 

Understanding and properly completing employment-related tax and benefit elections is a key factor in helping your child attain financial independence. Reach out to your CIBC Private Wealth relationship manager for more information. 

Amanda Regnier is a senior wealth strategist for CIBC Private Wealth in New York, with over 15 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high-net-worth clients.