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Chapter 2 Income, Benefits, and Taxes. Chapter 2 Objectives List and discuss types of earned income and unearned income Discuss types of self employment,

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Presentation on theme: "Chapter 2 Income, Benefits, and Taxes. Chapter 2 Objectives List and discuss types of earned income and unearned income Discuss types of self employment,"— Presentation transcript:

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 Slide 2

3 Slide 3 What Are the Sources of Earned Income? 2-1 Earned Income and Benefits A wage is pay for each hour worked. o Minimum wage – lowest rate by state law o 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.

4 Slide 4 What Is Self-Employment? 2-1 Earned Income and Benefits Self-employment is working for yourself. An entrepreneur is someone who is self- employed and owns a business. Lifestyle businesses o hobby, intends to keep it small, local, work it themselves Venture businesses – o intends to grow into corporation and expand

5 Self- Employment Small Business Advantages 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). Disadvantages 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 Slide 6 What Are Employee Benefits? 2-1 Earned Income and 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

7 Slide 7 Unearned vs. earned income Earned Wage/Hourly (minimum wage and overtime) Salary (no time cards or counting hours) Tips Commission (earned on amount of sale) Unearned Interest Dividends (cash and stock) Pension (retirement income) Government Transfer Payments: (EX: social security benefits, unemployment benefits, workers’ compensation)

8 Slide 8 What Type of Taxes Do You Pay? 2-2 Unearned Income and Benefits Taxes are based on consumption, income, and wealth. Direct taxes are paid directly to the government. o Examples: income and property taxes Indirect taxes are charged on goods or services bought by the consumer. o Examples: use, excise, and sales taxes

9 What Types of Taxes Do You Pay?  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.  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

10 Slide 10 How Do You Benefit from Paying Taxes? Direct benefits o Examples: roads and highways, social security, police protection, national parks 2-2 Unearned Income and Benefits Indirect benefits o Examples: security from armed forces, public education for citizens, free vaccines

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 Slide 11

12 Communication Skills – see pg. 53 Slide 12 2-2 Unearned Income and Benefits 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

13 Slide 13 Focus On... Social Security Benefits 2-2 Unearned Income and 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.

14 Methods for Paying Employees 1.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 3.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 Slide 17 What Are Paycheck Deductions? A deduction is money withheld from a paycheck. o Required deduction examples: income tax, social security tax, Medicare tax o 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

18 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? What is Miss Patty Paycheck’s gross pay for a two week pay period? 15 hours x $6.00/hr = $90.00/week # hours worked x wage = gross pay 30 hours x $6.00/hr = $180.00 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 $180.00 – ($14.10 + $5.45 + $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) FICA –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 –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 –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 Slide 25 2-3 Taxes and Other Deductions 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)

26 E-Filing – see page 66, 67 Slide 26 2-3 Taxes and Other Deductions 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.


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