Paycheck Tax Deductions Lesson 3-1

What is the Definition of Tax? Compulsory charges imposed on citizens by local, state, and federal government

Who Pays taxes? Anybody who uses money Working a job Buying/selling items or services.

What type of taxes do people Pay? Income Sales Property Social Security Medicare Vehicle registration Pet licenses

What Do you think is the approximate percentage of an individual’s paycheck that is deducted for taxes?

What does the government use tax money for?

Paycheck Tax Deductions A Deduction is any amount that is subtracted from gross pay. This money taken out of your paycheck is said to be Withheld. Taxes are the most common deduction. Employers are required to withhold money from employee pay and send it to the government. The money withheld for federal taxes is not the actual money you owe, but an estimation of your taxes owed for the year. When you file taxes, any difference in the withheld and actual amount is calculated and you either owe or receive a refund.

Federal taxes are determined by three things: 1) The amount of money you earn Federal income tax is a progressive tax meaning that the more a person makes, the higher their rate of taxation. 2) Your marital status The tax withholding for single employees is different from that of married employees who file taxes with a spouse. 3 ) The number of dependents you claim Withholding allowances are the number of dependents you have. Dependents are children or other people you are currently Responsible for financially. They depend on you for support. The more you have, the less tax will be withheld from your check. WITHHOLDING ALLOWANCE = Employee + Dependents (Spouse, Children, etc.)

Taxable income refers to the portion of your earnings that is able to be taxed. When you begin a new job, you fill out a W-4 withholding allowance certificate. This form is used to determine how much will be withheld from your check.W-4

Using a tax table, you can determine the wages to be withheld, based on whether the employee is single or married, which pay period they are on, and how many dependents they claim.

Example A Craig is single with no kids and works in manufacturing with a weekly gross pay of $ Determine the amount of federal income tax to be withheld from his paycheck. Jennifer is a single mom with three children. She makes $ per week. What is her federal income tax withholding according to the tax table?

SOCIAL SECURITY & MEDICARE DEDUCTIONS Employers are required to deduct a set percentage from employee pay for Social Security and Medicare. Together, these taxes are referred to as FICA taxes (Federal Insurance Contributions Act). On both of these deductions, the employer is responsible for matching the amount withheld for the employee, so the cost is shared.

Social Security This tax pays for retirement and disability benefits. 6.2% is withheld from your paycheck. Social security functions as a Public retirement system. The amount that you personally contribute right now, is being used to fund the current retirement of other people. You are paying out, with the promise from the government that you will receive social security in the future when you need it. Tax Rate: =

Medicare This tax provides health insurance for people over 65 years of age and others with certain disabilities. 1.45% is withheld from your paycheck for this tax. Medicare is a public based program similar to Social Security, in that you are paying into the system for future benefit to yourself. Tax Rate: =

Example B Bob earns $ per week. How much is withheld for Social Security? How much of Bob’s check is withheld for Medicare?

STATE INCOME TAXES In addition to the federal income tax, each state imposes an additional tax on workers. Currently there are seven states that have a flat-rate tax, meaning that all employees pay the same percentage no matter their income level.

Arizona State Income tax Arizona has a progressive tax, based on ranges in income/pay. The more you earn, the higher your tax rate. There are 5 income tax brackets for Arizona as of September If your income range is between:Your tax rate on income earned is: $0and $10, % $10,001and $25, % $25,001and $50, % $50,001and $150, % $150,001and over4.54%

Example C Josh is a dairy farm worker in Chandler, AZ. His annual salary is $23,670. Calculate the amount of state income tax that will be withheld for the year. Margaret works part-time at Circle K in Phoenix. She makes $415 biweekly. What will be her state income tax withheld on each paycheck?

NET PAY Your net pay, is the final calculated amount of a paycheck after federal taxes, FICA taxes, and state taxes are withheld. It is sometimes called take-home pay, because it is the part of your paycheck that you can physically take hold of and have full control over how it is spent. NET PAY = gross pay – (federal tax + Social Security + Medicare + state tax)

Example D Chloe earns $ per week as a grocery store cashier in Scottsdale. She is single and has a child. Complete her paycheck below to calculate her net pay for the week. Gross PayFed. Income Tax Social Security MedicareState Income Tax NET PAY