1. Chapter 2 Income, Benefits, and Taxes

2. Chapter 2 Objectives
List and discuss types of earned income and unearned income
Discuss types of self employment, advantages and disadvantages
Describe the types of taxes we pay and the benefits of paying taxes
Read a paycheck, noting required and optional deductions from gross pay
Discuss common federal tax forms
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3. What Are the Sources of Earned Income?
A wage is pay for each hour worked.
Minimum wage – lowest rate by state law
Overtime – 1½ times regular rate
A salary is pay for each month or year worked (no timecards used)
A tip is a gift of money for a service.
A commission is a set fee or percentage of a sale paid to the salesperson.
2-1 Earned Income and Benefits
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4. What Is Self-Employment?
Self-employment is working for yourself.
An entrepreneur is someone who is self-employed and owns a business.
Lifestyle businesses
hobby, intends to keep it small, local, work it themselves
Venture businesses –
intends to grow into corporation and expand
2-1 Earned Income and Benefits
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5. Self- Employment Small Business
Advantages
Disadvantages
ability to make decisions about running business
can set your own hours
can keep all the Profits:
(Profits are the amount left after all expenses are deducted from the revenues or sales of the business).
If business fails, invested money is lost
must take risks (risky)
hard to get credit
initial startup requires long hours and a lot of work
money is tight at first

6. What Are Employee Benefits?
Benefits are forms of pay other than salary or wages.
Pay without work- vacations, holidays, sick leave
Education-tuition reimbursement
Perks-parking spot, office with view, car, coffee station
Insurance-health, dental, worker’s comp
Retirement plans
Profit-sharing plans
Stock option plans
2-1 Earned Income and Benefits
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7. Unearned vs. earned income
Wage/Hourly (minimum wage and overtime)
Salary (no time cards or counting hours)
Tips
Commission (earned on amount of sale)
Interest
Dividends (cash and stock)
Pension (retirement income)
Government Transfer Payments:
(EX: social security benefits, unemployment benefits, workers’ compensation)
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8. What Type of Taxes Do You Pay?
Taxes are based on consumption, income, and wealth.
Direct taxes are paid directly to the government.
Examples: income and property taxes
Indirect taxes are charged on goods or services bought by the consumer.
Examples: use, excise, and sales taxes
2-2 Unearned Income and Benefits
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9. What Types of Taxes Do You Pay?
CONSUMPTION TAXES
Use taxes – paid when using certain good and services provided by government. Ex: toll road
Excise taxes – charged on the purchase of specific goods. Ex: phone, utilities
Sales taxes – added to purchase price of goods
Income Tax:
is a Progressive tax – the more you earn the more you pay in tax
(tax brackets)
Property Tax
paid by those who own real estate.

10. How Do You Benefit from Paying Taxes?
Direct benefits
Examples: roads and highways, social security, police protection, national parks
Indirect benefits
Examples: security from armed forces, public education for citizens, free vaccines
2-2 Unearned Income and Benefits
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11. Public Goods are paid for by your taxes
Three unique qualities of public goods:
We all benefit (they raise the overall standard of living in our country)
No one can be excluded from the benefits
People don’t necessarily benefit in proportion to taxes paid
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12. Communication Skills –see pg. 53
Critical Listening
Evaluate the information you hear.
Consider only important or relevant information.
Make good decisions based on what is accurate and useful.
*Remember the example
of the used car salesman
2-2 Unearned Income and Benefits
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13. Focus On . . . Social Security Benefits
Workers pay into the social security fund through payroll deductions.
A social security number is assigned to each person.
Employers match the payments.
Upon retirement, workers receive a monthly benefit check.
2-2 Unearned Income and Benefits
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14. Methods for Paying Employees
Paycheck
Paper check with stub
Least secure payment method because the employee is responsible for handling the paycheck
2. Direct Deposit
Employers directly deposit employee’s paycheck into the authorized employee’s bank account
Payroll Card
A payroll card electronically carries the balance of the employee’s net pay

15. Where Does My Money Go?
Imagine you have just started your first job! After the first week, you have earned $100. About how much money would you receive in your first paycheck??
A) $100
B) $84
C) $69
D) $55

16. Where Does My Money Go?
Up to 31% of an individual’s paycheck is deducted. Your net paycheck many only be about $69!
How do you get from $100 all the way down to $69?
Let’s take a look…

17. What Are Paycheck Deductions?
A deduction is money withheld from a paycheck.
Required deduction examples: income tax, social security tax, Medicare tax
Optional deduction examples: health insurance, life insurance, savings plan (401K)
Gross pay is total salary or wages.
Net pay is gross pay minus deductions.
2-3 Taxes and Other Deductions
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18. 30 hours x $6.00/hr = $180.00 for 2 weeks
What is the Gross Pay?
If Miss Patty Paycheck worked at Terrific Tacos for $6.00/hour for 15 hours a week what will her gross pay be?
# hours worked x wage = gross pay
15 hours x $6.00/hr = $90.00/week
What is Miss Patty Paycheck’s gross pay
for a two week pay period?
30 hours x $6.00/hr = $ for 2 weeks

19. Miss Patty Paycheck’s Paycheck
Miss Patty Paycheck’s paycheck includes:
Gross Pay $180.00
Payroll Withholdings:
Federal Withholding Tax $14.10
State Withholding Tax $5.45
FICA $13.77
What is her Net Pay?
Gross Pay – Payroll Withholdings = Net Pay
$ – ($ $ $13.77) = $146.68

20. Federal Withholding Tax
The amount required by law for employers to withhold from earned wages
to pay taxes (Tax Brackets based on income: 10%, 15%, 25%, 28%, 33%, 35%)
The amount of money deducted depends on the amount earned and information provided on the Form W-4 (In this case under 10% was deducted)
Largest deduction withheld from an employee’s gross income

21. State Withholding Tax
State Withholding Tax (Approx. 3% in this case)
The percentage deducted from an individual’s paycheck to assist in funding government agencies within the state
The percentage deducted depends on the amount of gross pay earned

22. FICA (Federal Insurance Contribution Act)
This tax includes two separate taxes: Fed OASDI/EE or Social Security and Fed MED/EE or Medicare
These two taxes can be combined as one line item or itemized separately on a paycheck stub

23. Social Security Social Security
Nation’s retirement program, helps provide retirement income for elderly and pays disability benefits
Based upon a percentage (6.2%) of gross income, employer matches the contribution made by the employee

24. Medicare
Medicare
Nation’s health care program for the elderly and disabled, provides hospital and medical insurance to those who qualify
Based upon a percentage (1.45%) of gross income

25. Tax Forms – see pages 66-68
W-2 – reports a worker’s taxable income for the year
1040EZ – a tax return for filers with no dependents or itemized deductions
1040A – a tax return that allows more options for income and deductions
1099- – reports interest earned and self-employment income (Ex: Landscaper, PT)
2-3 Taxes and Other Deductions
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26. E-Filing – see page 66, 67
It is a fast and safe way to file a tax return.
You can e-file yourself or hire an authorized e-file provider.
Those who meet adjusted gross income requirements can e-file free.
Refunds are often received much quicker.
2-3 Taxes and Other Deductions
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