Taxes and Your Paycheck

1. Taxes and Your Paycheck Chapter 5

2. Payroll Taxes • Payroll Taxes are taxes based on the payroll of a business • These taxes are paid to the government by you and your employer • Payroll Taxes include income taxes and social security taxes.

3. Income Taxes • Income Taxes are taxes you pay on most type of income you receive. • Income taxes are not a fixed percentage of income that all Americans. • The amount varies, depending on each taxpayer’s financial and family situation. • Some taxes on income support social programs.

4. 2011 Federal Tax Rate

5. Virginia Tax Rates IF YOUR VIRGINIA TAXABLE INCOME IS: Not over $3,000, your tax is 2% of your Virginia taxable income. but not your tax of excess over— over— I s— over— $ 3,000 $ 5,000 $ 60 + 3 % $ 3,000 $ 5,000 $ 17,000 $ 120 + 5 % $ 5,000 $ 17,000 $ 720 + 5.75 % $ 17,000 Example If your taxable income is $90,000, your tax is $720 + 5.75% of the amount over $17,000. This equals $720 + (.0575 x $73,000) = $720 + $4,197.50 = $4,917.50 which should be rounded to $4,918.

6. FICA • Federal Insurance Contribution Act • The law that requires workers to contribute to social security and Medicare.

7. Withholding • Your employer collects payroll taxes by deducting or withholding money from your wages. • Withholding enables the government to collect taxes at a steady rate, rather than at the end of the year. • Withholding also makes it more likely that people will pay their taxes.

8. Your pay stub • Your pay stub is always attached to your pay check

9. Your pay Stub • Gross income is the amount you earn before taxes are withheld. • Net Income is the amount you receive after withholdings are subtracted from your gross pay.

10. Form W-4 • When you are hired your employer will ask you to complete federal form W-4. • Form W-4 provides the information your employer needs to determine the proper amount to withhold from your paycheck.

11. Your Responsibility for Proper Withholding • If the amount withheld from your paycheck during the year is not close to the total tax you owe, the Internal Revenue Service may fine you. • The Internal Revenue Service (IRS) is the federal agency that collects income taxes.

12. Allowances • A worksheet provided with your W-4 tells you how to calculate the number of allowances you should claim. • An allowance is a number that reduces the amount of money withheld from your paycheck. • The larger the number of allowances you claim, the smaller the amount withheld.

13. Questions • How do you and other taxpayers benefit from the taxes you pay? • What are payroll taxes? • What is the purpose of Form W-4? • In what type of situations should you consider claiming extra allowances? • What is your main goal in determining how many allowances to claim?

14. Your Income Tax Return • A tax return is a set of forms that taxpayers use to calculate their tax obligation. • Income • Wages • Tips • Interest

15. Sources of Information for Your Tax Return • Form W-2 • This form is a summary of your earnings and withholdings for the year for a job.

16. Sources of Information for Your Tax Return • Form 1099-INT • This form is a statement of the interest your bank paid on your savings that year.

17. Income Tax Forms • Form 1040EZ • You must meet these criteria to use this form

18. Fill Out the 1040EZ • Identify Yourself • Social Security Number • Income • Your income today is $64,250.00 • Your Taxable Interest is $148.35 • Unemployment Compensation • This amount is $0.00 • Adjusted Gross Income • Amount of all above added together

23. Fill Out the 1040EZ • Determine Your Dedications • Yours is $9350 because you are single • Your Taxable Income • Adjusted Gross – Deductions • Federal Income Tax Withheld • $10,835 • Did you get a refund?

27. Questions • What information do you need to complete a Form 1040EZ, and where does it come from? • What is the difference between adjusted gross income and taxable income? • Why should you check your work before filing your tax return?

28. Taxes and Government • Contributions to Social Security • Under FICA regulations, workers’ wages are taxed at a rate of 6.20% • This percentage is collected on gross income up to a maximum level that is adjusted each year. • In 1999 the maximum income taxable for social security was 72,800.

29. Taxes and Government Cont. • Contributions to Medicare • An additional 1.45%is taken on all earned income to pay for the Medicare program. • Your Employer’s Contribution • Employers match employees’ payments for social security and Medicare. • For each dollar you earn up to the maximum amount, 15.3 cents goes to the government for these taxes.

30. Sources of Federal Government Income

31. Taxes and Income • There are 3 ways taxes are based on share of income they take as people’s income change • Progressive Tax • Takes a larger share of income as the amount of income grows. • Someone who makes $25,000 would pay 15% while someone who made $350,000 would pay 39.6%

32. Taxes and Income • Regressive taxes • These taxes take a smaller share of income as the amount of income grows. • Sales Tax • Joe 20,000 (pays 6% on 10,000 car) 3 percent of his income • Sally 50,000 (pays 6% on 10,000 car) 1.2 percent of her income • Proportional taxes • Takes the same share of all peoples taxes • No examples

33. How taxes are Collected • Direct • Taxes are paid directly to the government • Indirect • Taxes you pay that are included in the cost of a good • Landlords put property taxes in there rent • Pay-as-you-earn • Federal withholdings

34. Types of Taxes • Income Taxes • Most states and some cities have income taxes patterned after the federal system • Federal 15% to 39.6% • States less than 10% • Sales tax • Taxes added on to the price of goods and services at the time of purchase • Property taxes • Taxes on the value of real estate property.

35. Types of Taxes • Excise taxes • Taxes on sale of specific goods and services. • Such as tobacco, gasoline, and alcoholic beverages, firearms, air travel • Estate and Gift Taxes • Taxes on property which will be received by those legally entitles to the estate. • Gift taxes are taxes that may be paid by the giver of gifts worth more than 10,000

36. Types of Taxes • Business and License Tax • To operate certain kinds of business, companies, individuals have to have license, permit, or stamp • These taxes are paid for these certifications • Customs Duties and Tariffs • To control the flow of products that are imported into this US. • This sometimes results in items from abroad being sold at higher prices.

37. Questions • What is the largest source of federal government revenue? • Which governments benefit from sales taxes? • What are the principals of taxation? • What is the difference between sales and excise taxes?

38. Tax Cuts • Lower taxes encourage consumers to make beneficial choices. • New York eliminated sales taxes on certain products for short periods of time to encourage consumer spending to improve the economy • Many local governments in areas with high unemployment reduce property taxes for businesses that operate there.

39. Charities • If you contribute to a charity, the government may allow you to deduct your contribution from your adjusted gross income. • This tax break influences many people to give more to charities.

40. U.S. Government Spending

41. What State and Local Governments Provide • Buildings and maintaining local roads • Operating police and fire protection • Maintaining a criminal justice system • Building and staffing public schools • Building and operating state colleges and university

42. No Sales Tax States • Sales taxes in the United States are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon. Hawaii has a similar tax although it is charged to businesses instead of consumers.

43. No Income Tax States • Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

44. Best and Worst States for Taxes • Even if you live in the most heavily taxed state, Maine (which collects an average of 13.5% of residents' income), you might not be ready to high-tail it to Alaska, the state with the lowest taxes (6.6%, and the only state that lacks both sales and income taxes), unless you have an affinity for mosquitoes and seemingly endless tundra.