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Unit 2: Taxes. 5.1 Taxes and Your Paycheck 5.2 File a Tax Return. 5.1 Taxes and Your Paycheck. Goal: Describe payroll taxes and factors that determine withholding. 5.1 Key Terms (there are a lot). Payroll Tax Income Tax Federal Insurance Contribution Act (FICA) Withholding

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unit 2 taxes

Unit 2: Taxes

5.1 Taxes and Your Paycheck

5.2 File a Tax Return

5 1 taxes and your paycheck
5.1 Taxes and Your Paycheck

Goal:

  • Describe payroll taxes and factors that determine withholding.
5 1 key terms there are a lot
5.1 Key Terms (there are a lot)
  • Payroll Tax
  • Income Tax
  • Federal Insurance Contribution Act (FICA)
  • Withholding
  • Gross Income
  • Net Income
  • Form W-4
  • Internal Revenue Service (IRS)
  • Allowance
payroll taxes income taxes
Payroll Taxes & Income Taxes

Important Basics to Remember:

  • Payroll & Income taxes are withheld from employees’ pay by their employers.
  • Employers send withheld taxes to the federal government.
  • Payroll taxes include Social Security (FICA) tax and Medicare tax.
    • The Social Security tax rate is 6.2%.
    • The Medicare tax rate is 1.45%.
  • Employees complete Form W-4
  • Employers use Form W-4 to compute the amount of income tax to withhold.
payroll taxes a closer look
Payroll Taxes: A closer look
  • Payroll taxesare placed on income earned by individuals. The amount of payroll tax that is assessed on a person’s income is based on the individual’s total earnings and the tax laws that apply to that type of income.
what is fica
What is FICA?

Federal Insurance Contributions Act (FICA) tax:

The law that requires workers and their employers to contribute to Social Security and Medicare.

  • Social Security Tax: provides benefits for retired workers and their dependents as well as for the disabled and their dependents. Also known as the FICA tax.
  • Medicare Tax: used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.
income taxes a closer look
Income Taxes: A closer look
  • Income Taxes: are taxes you pay on most types of income you receive.
    • Income taxes are not a fixed percentage of income that all Americans pay.
    • Income taxes vary depending upon each taxpayer’s financial and family situation.
    • 2008 income tax rates ranged from 10%-35% of taxable income.
    • You are responsible for calculating the amount of federal income tax you owe.
what is a withholding
What is a Withholding?????????

Your employer collects payroll taxes by deducting or withholding money from your wages.

  • Simply put withholding: employer deductions from employee’s earnings to pay employee’s taxes.
let s put all this information into a real life example to make sense of it
Let’s put all this information into a real life example to make sense of it!
  • Kelly found a part-time job at a video store that pays $7.50 per hour. She wanted to take home at least $50.00 per week, so she agreed to work seven hours each Saturday. She expected her first paycheck to be $52.50. She was surprised to find it was only $40.39.
  • Why wasn’t Kelly’s paycheck what she expected?
      • Because of her payroll and income taxes
kelly example cont
Kelly Example cont…..
  • What is Kelly’s gross income?
        • Yes, $52.50 (7 hours X $7.50 per hour)
        • Gross Income: the amount you earn before taxes are withheld.
  • What is Kelly’s net income?
      • Yes, $40.39
      • Net Income: the amount you receive after withholdings are subtracted from your gross income. (also referred to as take-home pay)
concept reinforcement
Concept Reinforcement
  • Look at Kelly’s paycheck that was handed out for your notes and let’s go over it together.
form w 4
Form W-4
  • The amount of income tax you owe depends upon several factors:
      • Your gross income
      • The number of people you support
      • Other expenses you pay
  • When you are hired your employer will ask you to complete federal Form W-4, which is required by law.
what is an allowance not the one your parents give you for taking out the garbage
What is an allowance? (not the one your parents give you for taking out the garbage.
  • An allowance is the number that reduces the amount of income withheld from your pay.
  • The more allowances you claim, the smaller the amount withheld will be.
  • VERY IMPORTANT TO UNDERSTAND:
    • The number of allowances you claim will not change the amount of tax you owe. You alone are responsible for having enough income withheld to cover the amount of income tax you owe!
for example
For example:
  • Suppose you claim five allowances on your W-4 when you should only claim one. Will the amount withheld from your paycheck be larger or smaller ?
    • SMALLER
  • Based upon you W-4 your employer might withhold $500 from your pay over the year, but you may owe $3,000 in taxes. What happens?
    • You have to pay not only the rest of the taxes, $2,500, but you may also be charged interest and a fine because the amount withheld was not even close to the tax owed.
adjusting your allowance
Adjusting your allowance.
  • What if you are withholding too much:
    • can result in a refund by the IRS.
  • What if you are withholding too little:
    • Send extra tax payments to the IRS
    • Claim fewer allowances
    • Specify an extra amount to be withheld from each paycheck on your W-4.
overwithholding as a way to save
Overwithholding as a way to save?
  • Is having more income than necessary withheld from your paycheck a good way to save?
  • From a financial standpoint NO. Why?
    • If you have more money withheld you are in essence letting the government use your money for free. You deposited the extra money from each paycheck you could be earning interest on it instead.