# INCOME, BENEFITS AND TAXES

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INCOME, BENEFITS AND TAXES
CHAPTER 2: INCOME, BENEFITS AND TAXES

2-1 EARNED INCOME AND BENEFITS
Complete the following vocabulary terms: Minimum Wage: Overtime Pay: Commission: Entrepreneur: Minimum Wage: _The lowest pay rate allowed by law for each regular hour of work. Overtime Pay: Pay received for hours worked in addition to regular hours. Commission: A set fee or percentage of a sale paid to an employee instead or in addition to salary or wages. Entrepreneur: A person who takes the risks of being self-employed and owning a business.

Sources of Income \$7.25 higher 8 40
Wages: Hourly wages = paid for every hour worked Minimum Wage = ___________ in 2010 States can set a wage _________than the federal rate. An _____ hour day and ______ hour work week is standard. \$7.25 higher 8 40

1 ½ c. Overtime Pay: is_____ times the regular rate.
Example: What is the overtime pay rate if you are paid \$10.00 an hour? 10.00 * 1.5 = \$15.00

I. Sources of Income (Continue)
B. Salary is a set amount paid annually. 1. Do not keep time cards. 2. More flexibility in work hour 3. Work more than 40 hours a week

I. Sources of Income (Continue)
C. Tips: A gift to a person performing a service (usually a percentage.) a. Based on quality of service b. Employers withhold taxes based on tips. c. Minimum wage for tipped employee = ____ as long as with tip employee is making ________ or more on average. What do people consider when leaving a tip. a. Quality of service \$2.13/hr \$7.25

I. Sources of Income (Continue)
D. Commission: a set fee or a percentage of a sale paid to an employee.

GROSS PAY REINFORCEMENT
How much must an employer pay an hourly employee for hours worked beyond a regular work week? 1 ½ times their regular pay per hour.

Formula for calculating Pay
Gross Pay = Regular Hours Worked X Regular Pay X Overtime Rate + Overtime Hours Worked

GROSS PAY REINFORCEMENT
Compute gross pay for these situations: Regular hours worked: 40 Overtime hours worked: 5 Regular rate of pay: \$5.85 an hour Regular Pay = 40 X 5.85 = \$234.00 5.85 X 1.5 = 8.775 Overtime Pay Rate = \$5.85 x 1.5 = \$8.78 . Overtime Pay = 5 hrs x \$8.78 = \$43.90 Gross Pay = = \$

GROSS PAY REINFORCEMENT
Compute gross pay for these situations: Total hours worked: 43 hours ( in 5 days) Regular rate of pay: \$6.10 Regular Pay = 40 X 6.10 = \$244.00 Overtime Pay Rate = \$6.10 x 1.5 = \$9.15 5.85 X 1.5 = 8.775 Overtime Pay = 3 hrs x \$9.15 = \$27.45 Gross Pay = = \$271.45 .

GROSS PAY REINFORCEMENT
Compute gross pay for these situations: Annual Salary: \$18,000.00 Compute monthly gross pay Monthly Gross Pay = 18,000/12 = \$1,500.00 5.85 X 1.5 = 8.775 .

II What is Self-Employment
Entrepreneur Advantages of Owning Your Own Business Owner makes all the decisions Owners keep the profits _____________ amount left after all expenses are deducted from the revenues/sales of the business. Profit

II What is Self-Employment
C. Disadvantages of Owning Your Own Business a. Possibility of losing all the money put into the business. _ b. Risky, hard to get credit. c. Long hours. d. Responsible for all tasks.

Two main types: Lifestyle Business: Venture Business: The owner keeps the business small and the business exists for the lifetime of the owner. Examples of Lifestyle Businesses = Dentist Office Venture Business – Phil Knight started a business designing tennis shoes – Nike Bill Gates - Microsoft Larry Page and Sergey Brin invented Google Baby Einstein 1996 by stay-at-home mom and former teacher Julie Aigner-Clark \$18, became multimillion \$ company – Disney bought in and gives a portion of profit to Albert Einstein's estate The owner wants the business to grown into a large company with unlimited growth.

What are Employee Benefits
Employers provide benefits to full time employees. Employee may have to pay some of the cost for health insurance Cafeteria Plan: a benefit plan that allows workers to choose from a number of options.

Employee Benefits (cont)
Benefits ______________ the overall value a worker receives. Benefits can directly increase an employees ________________________ increase Disposable Income

Importance of Employee Benefits
1. Workers are not taxed on most benefits. 2. Allow workers to pay for some services at a help cheaper price. 3. Some benefits may not be available to individuals. 4. Some benefits may not be affordable to individuals. 5. Some benefits help workers reach financial goal.

Types of Benefits Pay without work Educational Benefits Perks
Paid Holidays Sick Leave Personal Leave Educational Benefits Perks

Types of Benefits (cont.)
Insurance Health Insurance Group Life Insurance Disability Insurance Workers Compensation Retirement Plans 401 K’s Pension Plan

HEALTH SPENDING ACCOUNT
Health Flexible Spending account Health Savings Account

UNEARNED INCOME AND PAYMENTS

What is Unearned Income?
Private Sources: Interest earned on Savings Accounts Certificate of Deposits (CD) U.S. Savings Bonds Dividends earned on a corporation’s profits distributed Cash Dividends payment of a percentage of profits made to stockholders Stock Dividends payment is made in the form of shares of stock. There are several sources of unearned income. It can come from Private sources, government transfer payments,

Unearned Income (cont.)
3. Pension Payments 4. Winnings/Prizes from the Lottery Variable Income: Money received from some type of activity other than working. a. Royalties b. Rent

Unearned Income (cont.)
Government Transfer Payments Types: Temporary assistance for needy families Medicaid Veterans Benefits Social Security Unemployment Compensation SAFETY NET Considered a Safeth

Unearned Income (cont.)
In-Cash Payments 1. Examples: Debit cards in a specified amount. In-Kind Payments Examples: Food Stamps, Rent subsidies, vouchers.

What Types of Taxes Do You Pay?
Taxes based on consumption _USE TAX – paid for goods and services provided by the government___ Examples: Excise Tax – charged on the purchase of specific goods 1. Examples: Gasoline, cigarettes, and alcoholic beverages. Sales Tax – added to the purchase price of consumer goods and services. Known as a Regressive Tax – takes a larger % from low income. Tolls, Parks, and Gasoline What consumers use of buy

What Types of Taxes Do You Pay?
B. Taxes based on Income Income taxes paid on earned and unearned income Known as a Progressive Tax- the more you earn, the more you pay What consumers use of buy

What Types of Taxes Do You Pay?
B. Taxes based on Wealth Property Tax: paid on real estate Assessed value may not be the same as the Market Value. Market Value – highest price the property would sell. Business Personal Property Tax is levied against property other than real estate. Federal Estate Tax Gift Tax What consumers use of buy

How do you benefit from Paying Taxes
Paying taxes _________ disposable income BENEFITS Direct Benefits: benefits those paying taxes and other who may not a. Example: Social Security b. Provide overall benefits Public Good: Goods and services provided by gov’t. Example: National Defense, Public Education. 3 Unique Qualities Everyone benefits No one can be excluded Those who benefit the most often pay the less.

Taxes and Other Deductions

What are Paycheck Deductions
Employees are required to have \$ withheld from your paycheck. Gross Pay = Total Pay Net Pay = Gross Pay – All Deductions Employees are required to have money withheld from your paycheck

Required Deductions Income Tax Withholding = Federal and State. .
Amount withheld based on your W-4 IRS provides details on how a person qualifies as a Dependent Minor children are claimed as dependents on their parents’ tax return. . Employees are required to have money withheld from your paycheck

Turn to Page 62 – Figure 2-3.1 Total the required taxes = Total the deductions = 1,850.52 Total Amount withheld 2,518.84 Compute the percentage of gross pay the taxes represent = Total the amount withheld = Total Amount Withheld = \$ = \$ Percentage of gross pay taxes represent = / = .19

W-4 Form

Required Deductions Social security Tax:
Self-Employed Social Security Tax = 12. 4% Why is the Self-Employed rate higher than the Employee rate? The self employed pays both the employer’s and employee’s portion

Form 1-9 Employment Eligibility Verification Form
Form shows if employee is a U.S. citizen Documents used to verify 1. U.S. Citizenship 2. Lawful permanent resident 3. Alien authorize to work in the U.S

Medicare Tax Medicare Tax = 1.45% Self-employed Medicare tax = 2.9% FICA = Federal Insurance Contribution Act Tax combines Social Security and Medicare Taxes

Workers Compensation Insurance
Pays medical and disability benefits to employees injured or contract disease on the job.

6.20% 1.45% 7.65% Payroll Taxes Payroll Tax Rates
Social Security Tax Rate Medicare Tax Rate Total Payroll Taxes 6.20% What are payroll deductions SS Medicare Federal taxes State taxes Employee benefits Unemployment insurance Retirement List can go on and on. 1.45% 7.65%

W-2 Form Will receive from each company you worked for during one year. A summary for the income you earned that year and all amounts the employer withheld for taxes. Federal, State, and local taxes.

What are the taxes affect on gross pay?
If an employee earns \$1,000.00 What is the Net Pay Payroll Tax Rates Social Security Tax Rate Medicare Tax Rate Total Payroll Taxes \$62.00 6.2% There is a maximum annual amount of Social Security tax withheld per employee. Social Security taxes are not withheld on amounts over the earnings limit. For 2010, the earnings limit was \$106,800, and the maximum Social Security tax was \$6, (\$106,800 x 6.2%). There is no limit on the amount of wages subject to Medicare tax. Gross Pay – Taxes – All other deductions = Net Pay \$14.50 1.45% 1, – = \$76.50 7.6%

Calculate the following Net Pay
In the following scenario determine the net pay if Matt gets paid every two weeks. Matt receives 48, annual salary Social Security = 6.2% Medicare = 1.45% Federal Income Tax = \$ State Income Tax = \$45.73 State Unemployment Insurance = .42% Life Insurance \$20.00 per pay Savings Plan \$100 per pay

How to get started What is Matt’s gross pay amount every two weeks?
(\$48.500/52) * 2 = \$1,865.38 Matt’s gross pay ever 2 weeks = \$1,865.38

How to get started – Matt’s Deductions.
Social Security = Medicare = Federal Income Tax = \$216 State Income Tax = \$45.73 State Unemployment Insurance = Life Insurance = \$20.00 Savings Plan = \$100. \$ * = \$115.65 \$ * = \$27.05 \$ * = \$7.83

NET PAY = GROSS PAY TAXES DEDUCTIONS Annual 1865.39 Social Security
\$115.65 Life Insurance \$20 Medicare Tax \$27.05 Savings Plan \$100 Fed. Inc Tax \$216.00 State Inc Tax \$45.75 State Unempl. \$7.83 \$412.28 \$120 \$ NET PAY = \$

SCENARIO In this simulation, you will take on the role of Matthew Jones in order to reinforce how to complete Form W-4. You are not married. You have no children. No one else depends on you for income or support. In May, you graduated from college with a degree in marketing. .

1 1 1 3 x 3 Matthew Jones 5022 Oak Tree Drive. ANYTOWN, US 00001
1 3 Matthew Jones x Most people in the income bracket of Lawrence will usually choose 1 for the exemptions, less is given to the government each paycheck. 5022 Oak Tree Drive. ANYTOWN, US 00001 3

W-4 – you can take less exemptions. Fewer Exemptions = Greater Tax taken out More Exemptions = Less Tax Taken Out How do you know?

Assignment Go to my web site – Under the Links for Chapter 2
Select – Taxes Click on W-4 Calculator Which of the following Exemptions would you pick and why? 0 Exemptions, 1 Exemption Or 2 Exemptions

1 1 Matthew Jones 1 3 123-45-6789 x Matthew Jones 5022 Oak Tree Drive.
1 3 Matthew Jones x Most people in the income bracket of Lawrence will usually choose 1 for the exemptions, less is given to the government each paycheck. 5022 Oak Tree Drive. ANYTOWN, US 00001 Matthew Jones

\$48,500 \$5,616.00 \$51,100.00 \$3,007.00 ABC Bank 5 Fox Run Road Deptford, NJ 08012 \$ 51,100.00 \$703.25 D \$2,600.00 Matthew Jones 987 Maple Street Deptford, NJ 08012 X NJ 12345 \$ 48,500.00 \$ \$51,100.00 Dept

FORM 1040EZ Use Matt’s W-2 form to fill out the 1040EZ Tax form.
Other needed information Matt is single and can not be claimed as a dependent on anyone else’s tax return. Matt earned \$ in interest Matt does not want to give any money to the Presidential election fund. Matt works as a Bank Manager

Sample Tax Return