Understanding Income and Taxes. Terms to Know Earned Income Wage Salary Piecework Tips Bonus Profit...

Understanding Income and Taxes

Terms to Know

• Earned Income• Wage• Salary• Piecework• Tips• Bonus• Profit Sharing• Deductions• Gross Pay

• Net Pay• Exemption• W-4 Form• FICA• W-2 Form• SSI• Medicare• Medicaid• Unemployment

Forms of Income

• Wages• Salary • Commission• Piecework• Tips• Bonus• Fringe Benefits

Forms of Income

• Wage: set amount of pay for every hour

• Minimum wage• Receive a paycheck

either weekly or bi-weekly

• Salary: set amount of money paid for a period of time

• Amount of $ divided equally over a year

• Ex: $75,000 a year

Forms of Income

• Commission: % of sales you make

• The more you sell, the more you make!

• Piecework: paid a fixed amount of $ for each piece of work you do

Forms of Income

• Tips: small amounts of money given by customers

• Usually workers receive an hourly wage plus tips

• Bonus: Extra payment in addition to the workers’ regular pay

• Incentives• Year-end bonuses

Forms of Income

• Profit Sharing: If the employees’ hard work results in greater profits for the company, the company returns some of those profits to the employees

Forms of Income

• Fringe Benefits: Receive extra financial rewards

• Vacation• Holidays• Sick leave• Health & Life

insurance

Understanding your paycheck • Upon receiving your paycheck, many are

surprised to find it smaller than expected.• For each paycheck received, part of your

earnings are deducted by your employer.

Understanding your paycheck

• Gross Pay: total amount of money

• Net Pay: gross pay – deductions

Understanding your paycheck

• Exemption: set amount of $ on which you do not have to pay tax

• Each exemption you claim lowers the amount of tax deducted from your paycheck

• Always claim 1(yourself)

• Claim more than one if you have children and/or spouse

Understanding your paycheck • When you begin a job, you must complete a W-4

Form• W-4 Form: lets the employer (your job) know

how much taxes to take out of your paycheck

Understanding your paycheck

• FICA (Federal Insurance Contributions Act): the amount of social security tax withheld from your paycheck

• Example:

$199.80 (Gross)

- $ 20.70 (State, Federal, and SS taxes)

__________________

$158.51 (Net)

Paycheck Activity

• Hours worked 40

• Regular earnings $ 260.00

• FICA $ 18.00

• Federal Tax $ 24.00

• State Tax $ 12.00

• Pay $ 206.00

Paycheck Activity

• Lady Gaga works full-time during the summer at a local fast-food restaurant & this is her paycheck stub.

• What is Lady Gaga’s gross pay?• How much were the total deductions made from her

paycheck?• What is Lady Gaga’s net pay?• How many hours did she work for one week?• What is her hourly wage?• Why did Lady Gaga have to fill out a W-4 form?• If Lady Gaga is single and is claimed by her parents’ tax

return as an exemption. Can she claim herself as an exemption on her W-4 form?

Taxes

• Taxes are payments that citizens (you) and businesses are required to pay to city, county, state, and federal governments.

• A Personal Income

Tax• B Social Security Tax• C Property Tax• D Sales Tax• E Excise Tax

Types of Taxes

• Personal Income tax: a tax on the amount of money a person earns

• Social Security tax: also a tax on a person’s income

Types of Taxes

• Property tax – tax on the value of personal property and real estate a person owns

ex: houses, land, cars, boats, etc.

Types of taxes

• Sales tax – tax on goods and services, you pay this everytime you buy something!

• Excise tax- tax placed on gasoline, cigarettes, liquor, telephone service

Services & Facilities Funded by Tax Dollars

• Airports• Community colleges• Fire protection• Garbage collection• Hospitals• Libraries• Medicaid benefits• Medicare benefits• National defense• Parks & recreation

• Police protection• Public schools• Public transportation• Public welfare• Road maintenance• Scientific research• Social Security benefits• State universities• Unemployment insurance• Workers’ compensation

Taxes

• Direct taxes: charged directly to the taxpayer….personal, property and sales tax

• Indirect taxes: included in the price of taxed items….excise taxes on cigarettes and gasoline

Taxes

• Progressive taxes: takes a greater share of income from the rich than the poor…..As you make more money, you get taxed higher!

• Regressive taxes: opposite of progressive tax….sales tax

Preparing Tax Returns

• It is possible for your employer to either deduct too much taxes or not enough

• Every year you must file a tax return to determine if you overpayed or didn’t pay enough taxes

• In January of each year, you will receive a W-2 Form

W-2 Form

• W-2 form shows the amount of $$ you were paid in the previous year & how much taxes were deducted

Tax Forms

• The 3 common forms for filing a federal tax return are:

• 1040EZ 1040A 1040

Preparing your taxes

• Get all financial records together• Read all instructions carefully• Prepare form in pencil first• Make a copy of the completed form

Social Security Benefits

• Retirement• Disability• Survivors• Medicare• Medicaid

Medicare vs Medicaid

• 65 or older• Anyone with

permanent kidney failure

• Certain people with disabilities

• Funded by Gov’t• Pays for health

services for people who can’t pay for it

• Low-income people who are aged, blind or disabled

Worker’s Compensation

• Worker’s compensation: another insurance program managed by the states, people who are injured on the job.

Worker’s Compensation

• The major benefits provided by workers’ compensation are the following:

• Medical care

• Disability income

• Rehabilitation benefits

• Death benefits

Unemployment Insurance

• Unemployment insurance: provides benefits to workers who have lost their jobs.

• It’s temporary, until you find another job!