2. Part 6—Managing Your Income Chapter 23 Understanding Income and Taxes

3. Thinking Back What are the different forms of income an employee can receive? What are the different forms of income an employee can receive? What is the difference between gross pay and net pay? What is the difference between gross pay and net pay? How are consumers taxed and what types of taxes do they pay? How are consumers taxed and what types of taxes do they pay? What benefits are provided through the social security program? What benefits are provided through the social security program?

4. Chapter Objectives Describe the different forms of income and fringe benefits an employee can receive for doing a job. Describe the different forms of income and fringe benefits an employee can receive for doing a job. Distinguish between gross pay and net pay. Distinguish between gross pay and net pay. Describe paycheck deductions. Describe paycheck deductions. Identify the various services and facilities provided by tax dollars. Identify the various services and facilities provided by tax dollars. Describe how consumers are taxed and the types of taxes they pay. Describe how consumers are taxed and the types of taxes they pay. continued

5. Chapter Objectives Simulate filing a federal income tax return. Simulate filing a federal income tax return. Describe the purpose of, and benefits provided by, the Social Security program, Medicaid, Medicare, workers’ compensation, and unemployment insurance. Describe the purpose of, and benefits provided by, the Social Security program, Medicaid, Medicare, workers’ compensation, and unemployment insurance.

6. Key Concepts Earned income can include wages, salaries, commissions, piecework, tips, bonuses, and fringe benefits. Earned income can include wages, salaries, commissions, piecework, tips, bonuses, and fringe benefits. Paycheck deductions include social security and federal income taxes, and may include state income taxes, union dues, and insurance premiums. Paycheck deductions include social security and federal income taxes, and may include state income taxes, union dues, and insurance premiums. The taxes you will be paying include personal income tax, social security tax, property tax, sales tax, and excise tax. The taxes you will be paying include personal income tax, social security tax, property tax, sales tax, and excise tax. continued

7. Key Concepts Social security provides income when earnings are reduced or stopped because of retirement, disability, or death. Social security provides income when earnings are reduced or stopped because of retirement, disability, or death. Worker’s compensation provides payments to workers when they are injured on the job. Worker’s compensation provides payments to workers when they are injured on the job. Unemployment insurance provides benefits to workers who have lost their jobs. Unemployment insurance provides benefits to workers who have lost their jobs.

8. Forms of Income  Earned income: The money you are paid for doing a job. The form of income you receive depends on the type of job you have. The form of income you receive depends on the type of job you have. If you are a real estate agent, you are probably paid a commission. If you are a real estate agent, you are probably paid a commission. continued

9. Forms of Income Common forms of income: Common forms of income: Wages. Wages. Salary. Salary. Commission. Commission. Piecework. Piecework. Tips. Tips. Bonus. Bonus. Profit sharing. Profit sharing. Fringe benefits. Fringe benefits.

10. Wages  Wage: A set amount of pay for every hour of work. Hourly wages vary depending on the type of job and the employee’s experience and skills. Hourly wages vary depending on the type of job and the employee’s experience and skills. Minimum wage is the lowest amount an employer can legally pay a worker per hour. Minimum wage is the lowest amount an employer can legally pay a worker per hour. continued

11. Wages Workers are paid overtime if they work more than 40 hours per week. Workers are paid overtime if they work more than 40 hours per week. Overtime pay is usually one-and-a-half times a workers regular wage. Overtime pay is usually one-and-a-half times a workers regular wage.

12. Salary  Salary: A set amount of money paid for a certain period of time. Workers with more skills and experience usually earn salaries. Workers with more skills and experience usually earn salaries. Salaried workers are less likely to receive overtime pay. Salaried workers are less likely to receive overtime pay.

13. Commission Sometimes workers in sales earn commission, or a percentage of their sales. Sometimes workers in sales earn commission, or a percentage of their sales. Commission is an incentive for workers to sell more. Commission is an incentive for workers to sell more. The more a person sells, the more money they make. The more a person sells, the more money they make.

14. Piecework  Piecework: An employee receives a set amount for each piece of work they do. Piecework can serve as an incentive for higher production. Piecework can serve as an incentive for higher production. Pay for piecework has to be equal to or higher than minimum wage. Pay for piecework has to be equal to or higher than minimum wage.

15. Tips  Tips: Small amounts of money given by customers to service- related workers in return for service. Tipping is a way for customers to reward workers for good service. Tipping is a way for customers to reward workers for good service. Tips are part of income and subject to income tax regulations. Tips are part of income and subject to income tax regulations.

16. Bonus  Bonus: An extra payment in addition to the worker’s regular pay. An incentive bonus encourages workers to produce more. An incentive bonus encourages workers to produce more. A year-end bonus may be used to encourage workers to stay with a company. A year-end bonus may be used to encourage workers to stay with a company.

17. Profit Sharing  Profit sharing: Company stock or bonuses used to reward employee’s hard work and encourage greater productivity. An employee’s share may be based on seniority, productivity, evaluations, or other criteria. An employee’s share may be based on seniority, productivity, evaluations, or other criteria.

18. Fringe Benefits Fringe benefits are extra financial rewards in addition to income. Fringe benefits are extra financial rewards in addition to income. Fringe benefits may include: Fringe benefits may include: Paid vacation time. Paid vacation time. Paid holidays. Paid holidays. Paid sick leave. Paid sick leave. Paid health and life insurance. Paid health and life insurance. Company child care facilities. Company child care facilities. Tuition aid. Tuition aid. Fringe benefits are a major consideration in choosing a job. Fringe benefits are a major consideration in choosing a job.

19. Understanding Your Paycheck  Deductions: Amounts of money subtracted from your paycheck for tax payments and other expenses.  Gross pay: The total amount earned for a pay period before deductions are subtracted.  Net pay: Gross pay minus deductions. continued

20. Understanding Your Paycheck Social security tax and federal income tax are two deductions your employer makes. Social security tax and federal income tax are two deductions your employer makes. Social security tax is a set percentage of your income. Social security tax is a set percentage of your income. Federal income tax depends on how much money you make and the number of exemptions you are allowed. Federal income tax depends on how much money you make and the number of exemptions you are allowed.  Exemption: A set amount of money on which you do not have to pay tax.  Form W-4: The Employer’s Withholding Allowance Certificate, which gives your employer information needed to determine how much tax to withhold from your paycheck. continued

21. Understanding Your Paycheck Each exemption you claim makes the amount deducted from your paycheck lower. Each exemption you claim makes the amount deducted from your paycheck lower.  FICA: The Federal insurance Contributions Act, which began the social security tax.

22. Taxes Because we pay taxes and social security, the government is able to provide certain services and benefits. Because we pay taxes and social security, the government is able to provide certain services and benefits. Citizens are required to pay taxes to city, county, state, and federal governments. Citizens are required to pay taxes to city, county, state, and federal governments.

23. Types of Taxes Personal income tax – tax on the amount of money you earn. Personal income tax – tax on the amount of money you earn. Social security tax – tax on your income; used to pay for the social security program. Social security tax – tax on your income; used to pay for the social security program. Property tax – tax on the value of property or real estate you own. Property tax – tax on the value of property or real estate you own. Sales tax – tax on goods and services. Sales tax – tax on goods and services. Excise tax – tax placed on certain goods and services (gasoline, cigarettes, liquor, and telephone service). Excise tax – tax placed on certain goods and services (gasoline, cigarettes, liquor, and telephone service). continued

24. Types of Taxes Some types of taxes may fit in more than one classification: Some types of taxes may fit in more than one classification: Direct taxes – charged directly to the taxpayer. Direct taxes – charged directly to the taxpayer. Indirect taxes – included in the price of taxed items. Indirect taxes – included in the price of taxed items. Progressive taxes – take a greater share of income from the rich than the poor. Progressive taxes – take a greater share of income from the rich than the poor. Regressive taxes – take a lower percentage of income from the rich and a higher percentage from the poor. Regressive taxes – take a lower percentage of income from the rich and a higher percentage from the poor.

25. Preparing Tax Returns Tax returns must be filed yearly declaring how much income you made and how much federal tax you owe. Tax returns must be filed yearly declaring how much income you made and how much federal tax you owe. If your state taxes income, you will have to file a state tax return. However, everyone who earns money must file a federal tax return. If your state taxes income, you will have to file a state tax return. However, everyone who earns money must file a federal tax return. continued

26. Preparing Tax Returns You will receive a refund if too much tax was withheld, but if too little was withheld you have to pay the amount owed. You will receive a refund if too much tax was withheld, but if too little was withheld you have to pay the amount owed.  Form W-2: The Wage and Tax Statement that shows the amount you were paid the year before. Your Form W-2 will help you prepare your federal income tax return. Your Form W-2 will help you prepare your federal income tax return. On your tax return you must list: On your tax return you must list: All income made from wages, salaries, tips, and bonuses. All income made from wages, salaries, tips, and bonuses. Money made from savings accounts, stocks, bonds, and other financial investments. Money made from savings accounts, stocks, bonds, and other financial investments. continued

27. Preparing Tax Returns Forms 1040EZ and 1040A: Forms 1040EZ and 1040A: Short forms. Short forms. Easiest and quickest to file. Easiest and quickest to file. Used by taxpayers whose income is in a certain range and who do not choose to itemize deductions. Used by taxpayers whose income is in a certain range and who do not choose to itemize deductions. Form 1040: Form 1040: Long form. Long form. Requires more time and information; usually have to file extra tax forms with it. Requires more time and information; usually have to file extra tax forms with it. continued

28. Preparing Tax Returns When preparing your federal tax return, you should: When preparing your federal tax return, you should: Get all your financial records together. Get all your financial records together. Read instructions before you begin. Read instructions before you begin. Prepare forms in pencil first. Prepare forms in pencil first. Make copies of finished forms for your records. Make copies of finished forms for your records. April 15 th is the final date for filing; you may have to pay penalties or interest fees if you file late. April 15 th is the final date for filing; you may have to pay penalties or interest fees if you file late.

29. Filing Your First Tax Return To fill out Form 1040EZ: To fill out Form 1040EZ: Determine your filing status. Determine your filing status. Report your income. Report your income. Identify payments and taxes. Identify payments and taxes. Determine the refund or amount owed. Determine the refund or amount owed. Sign the return. Sign the return. Attach a copy of Form W-2. Attach a copy of Form W-2. Mail form to the Internal Revenue Service Center. Mail form to the Internal Revenue Service Center.

30. Social Security Social security is the government program that provides income when family wages are lessened or stopped due to retirement, disability, or death. Social security is the government program that provides income when family wages are lessened or stopped due to retirement, disability, or death. It is not intended to replace the earnings you formerly received. It is a basic level of income for you to build on. It is not intended to replace the earnings you formerly received. It is a basic level of income for you to build on.

31. Social Security Benefits Employers and employees both pay social security taxes. Employers and employees both pay social security taxes. Social security taxes deducted from your paycheck pay for other people’s benefits. Social security taxes deducted from your paycheck pay for other people’s benefits. When you receive social security benefits, they will be paid for by the taxes of other people. When you receive social security benefits, they will be paid for by the taxes of other people. continued

32. Social Security Benefits Types of social security benefits include: Types of social security benefits include: Retirement benefits. Retirement benefits. Disability benefits. Disability benefits. Survivors’ benefits. Survivors’ benefits. Medicare benefits. Medicare benefits. Medicaid benefits. Medicaid benefits. continued

33. Social Security Benefits Retirement benefits: Retirement benefits: Eligible at age 67 for people born after 1959. Eligible at age 67 for people born after 1959. Workers who retire earlier will receive lower benefits. Workers who retire earlier will receive lower benefits. Disability benefits: Disability benefits: Eligible if worker has severe physical or mental condition preventing him or her from working that is expected to last at least 12 months or result in death. Eligible if worker has severe physical or mental condition preventing him or her from working that is expected to last at least 12 months or result in death. Survivors’ benefits: Survivors’ benefits: If a worker dies, benefits are paid to family members. If a worker dies, benefits are paid to family members.  Supplemental Security Income (SSI): Benefits for people with disabilities who have little income.

34. Medicare Benefits  Medicare: The health insurance program provided through social security. The program was created to give older citizens and people with disabilities affordable health insurance. The program was created to give older citizens and people with disabilities affordable health insurance. Medicare provides hospital insurance, medical insurance, and prescription drug insurance. Medicare provides hospital insurance, medical insurance, and prescription drug insurance.

35. Medicaid Benefits  Medicaid: A health care program funded by the government for those people who cannot pay for health services. The program is run by participating states that set the income level for acceptance into the program. The program is run by participating states that set the income level for acceptance into the program. Medicaid covers hospital, laboratory, and clinic services in most states. Some states include additional services. Medicaid covers hospital, laboratory, and clinic services in most states. Some states include additional services.

36. Workers’ Compensation Workers’ compensation is an insurance program managed by the states that provides payments to workers who have been injured on the job. Workers’ compensation is an insurance program managed by the states that provides payments to workers who have been injured on the job. Benefits include: Benefits include: Medical care benefits. Medical care benefits. Disability income. Disability income. Rehabilitation benefits. Rehabilitation benefits. Death benefits. Death benefits. continued

37. Workers’ Compensation Medical care benefits: Medical care benefits: All medical expenses are covered, including hospital costs, doctors’ fees, and rehabilitation services. All medical expenses are covered, including hospital costs, doctors’ fees, and rehabilitation services. Disability income: Disability income: Disabled workers who cannot come back to work receive a percentage of their weekly wage until they return to work. Disabled workers who cannot come back to work receive a percentage of their weekly wage until they return to work. continued

38. Workers’ Compensation Rehabilitation benefits: Rehabilitation benefits: Money for retraining workers whose injuries force them to give up their jobs. Money for retraining workers whose injuries force them to give up their jobs. Death benefits: Death benefits: A deceased worker’s spouse or children receive a certain amount of money. A deceased worker’s spouse or children receive a certain amount of money.

39. Unemployment Insurance  Unemployment insurance: Provides benefits to workers who have lost their jobs. Common requirements to qualify for unemployment insurance: Common requirements to qualify for unemployment insurance: Length of employment meets minimum requirement, usually one year. Length of employment meets minimum requirement, usually one year. Loss of job through no fault of the worker. Loss of job through no fault of the worker. These benefits are not permanent. They are meant to provide income security until the worker has another job. These benefits are not permanent. They are meant to provide income security until the worker has another job.

40. Thinking Back What are the different forms of income an employee can receive? What are the different forms of income an employee can receive? What is the difference between gross pay and net pay? What is the difference between gross pay and net pay? How are consumers taxed and what types of taxes do they pay? How are consumers taxed and what types of taxes do they pay? What benefits are provided through the social security program? What benefits are provided through the social security program?