Where Did My Where Did My Paycheck Go?Paycheck Go?

Understanding Understanding Income, Paychecks Income, Paychecks

& Taxes& Taxes

Scenario:Scenario:You make You make $10 an hour $10 an hour and work for and work for 10 10 hourshours….….

How much will your paycheck be?How much will your paycheck be?

$100 $100 ? ($10 x 10)? ($10 x 10)

WRONG! WRONG! It is actually closer to It is actually closer to $80.00$80.00

HOW CAN THIS BE?????HOW CAN THIS BE?????

A certain percentage of every paycheck is A certain percentage of every paycheck is DEDUCTED for taxes. Let’s learn more…DEDUCTED for taxes. Let’s learn more…

What are Taxes?What are Taxes? Taxes are required payments Taxes are required payments

of money to governmentsof money to governments That are used to provide That are used to provide public goods and servicespublic goods and services which benefit the community which benefit the community as a whole.as a whole.

What are “public What are “public goods and services”?goods and services”?

1) 1) Benefits that cannot be Benefits that cannot be withheld from those who withheld from those who don’t paydon’t payEven if you do not make enough Even if you do not make enough money to pay taxes, you can still money to pay taxes, you can still count on the fire department to count on the fire department to put out the fire in your house.put out the fire in your house.

2) 2) Benefits that may be Benefits that may be “consumed “ by one person “consumed “ by one person without reducing the amount without reducing the amount of the product or service of the product or service available for others.available for others.It will not use up all the fire It will not use up all the fire service if they put out the fire service if they put out the fire in your housein your house!!

““Public Goods and Public Goods and Services” cont.Services” cont.

Other examples of Other examples of public public goods and servicesgoods and services are: are: National defenseNational defense Streetlights, roads and highwaysStreetlights, roads and highways Public services including welfare Public services including welfare

programsprograms Public librariesPublic libraries Law enforcementLaw enforcement Monitoring and regulating trade Monitoring and regulating trade

and the economy.and the economy.

How does the government How does the government collect taxes?collect taxes?

• Sales TaxSales Tax• Property TaxProperty Tax• Payroll TaxesPayroll Taxes (this is the (this is the MAINMAIN

way)way)• Social Security Tax Social Security Tax (also called FICA)(also called FICA)

• Medicare TaxMedicare Tax• Federal Income TaxFederal Income Tax• State Income TaxState Income Tax

Social Security TaxesSocial Security Taxes

Taxes collected to fund federal Taxes collected to fund federal programs which provide:programs which provide: Retirement benefitsRetirement benefits

For workers when they reach age 65For workers when they reach age 65 For dependents of retired workersFor dependents of retired workers For the disabled and their dependentsFor the disabled and their dependents

How much? 7.65% of wagesHow much? 7.65% of wages

Medicare TaxMedicare Tax

Taxes collected to fund federal Taxes collected to fund federal programs which provide:programs which provide: Medical benefitsMedical benefits

For individuals when they reach age For individuals when they reach age 6565

Spouses of retired workersSpouses of retired workers

How much? 1.45% of wagesHow much? 1.45% of wages

Income TaxesIncome TaxesAll income from wages, salaries, All income from wages, salaries, commissions and tips is taxable.commissions and tips is taxable.

FederalFederal – supports national programs – supports national programsStateState – supports state programs – supports state programs(WA has sales tax instead of income tax!)(WA has sales tax instead of income tax!)

How much?How much? Varies. People who earn Varies. People who earn moremore pay a higher percentage of their pay a higher percentage of their income in income taxes. (“Tax income in income taxes. (“Tax Brackets”)Brackets”)

These taxes are the reason you These taxes are the reason you take home less than you maketake home less than you make

Your Your GROSS PAYGROSS PAY is the amount of money is the amount of money you earn you earn beforebefore payroll deductions. payroll deductions.

Your Your NET PAYNET PAY or or TAKE-HOMETAKE-HOME pay is the pay is the amount you receive amount you receive after after deductions. deductions.

Gross Pay – Deductions (Taxes) = Gross Pay – Deductions (Taxes) = Net PayNet Pay

How does your employer How does your employer know how much to withhold know how much to withhold

from your paycheck?from your paycheck?

You complete FORM W-4 You complete FORM W-4 (see example)(see example) Your employer uses FORM W-4 to determine Your employer uses FORM W-4 to determine

what amount of income tax they should what amount of income tax they should deduct (or “withhold”) from your paycheckdeduct (or “withhold”) from your paycheck

These withholdings will act as a “pay-as-These withholdings will act as a “pay-as-you-go” system for paying your federal you-go” system for paying your federal income taxes each year.income taxes each year.

The amount of federal The amount of federal income tax withholding income tax withholding

depends ondepends on If you are married or singleIf you are married or single How many dependents How many dependents

(children) you have(children) you have Any exemptions that you claimAny exemptions that you claim Any additional amount you Any additional amount you

want withheld (investments, want withheld (investments, benefits, etc.)benefits, etc.)

In January…In January… Your employer will provide you Your employer will provide you

(and the government) with your (and the government) with your W-2 Form.W-2 Form. It reports your wage, salary, tips It reports your wage, salary, tips

and income taxes paid during the and income taxes paid during the previous year.previous year.

By April 15By April 15thth……

You use FORM W-2 to complete You use FORM W-2 to complete your Federal Tax Return (Due your Federal Tax Return (Due April 15April 15thth)) If over the course of the year you paid If over the course of the year you paid

moremore income tax than necessary, you income tax than necessary, you will receive a tax will receive a tax refundrefund from the from the government.government.

If you paid If you paid less less income tax than income tax than necessary, you will have to make a necessary, you will have to make a payment payment to the government. to the government.

What’s next?What’s next?

Tax Terms Notes & BINGOTax Terms Notes & BINGO(What are tax deductions, credits and (What are tax deductions, credits and

exemptions?) exemptions?)

And thenAnd then…we get to learn how to calculate …we get to learn how to calculate our OWN taxes!!!our OWN taxes!!!

WOOHOO!WOOHOO!