Taxes & Spending Payroll Deductions 4.01 B – Explain taxes on income.

Deductions Amount of money that is subtracted from gross earnings Amount of money that is subtracted from gross earningsEquation Gross earnings-Deductions=Net earnings (take home pay) Gross earnings-Deductions=Net earnings (take home pay)

Net Pay = what’s left after deductions! After the unwanted water goes through the “net”, what is left? After the unwanted water goes through the “net”, what is left? The fish The fish your take home $ your take home $

Deductions Required by Law Federal Income Tax Federal Income Tax Social Security Tax Social Security Tax State and Local Taxes State and Local Taxes Court Ordered Deductions Court Ordered Deductions

Federal Income Tax Based on a person’s earned income Based on a person’s earned income Employers withhold taxes based on Employers withhold taxes based on –$ amount of wages paid, –The employee’s W-4 form, status, exemptions –Federal tax tables “Pay as you go” system for employee- “Pay as you go” system for employee- –Taxes deducted from each check –Estimate of final tax due (when file tax return) Payments sent (remitted) to the IRS Payments sent (remitted) to the IRS

Federal Income Tax Why do you think it is important to withhold taxpayers money as it is earned? What are the advantages for the government? and the taxpayer? and the taxpayer?

Form W-4*, NC-4 Federal form for employee’s withholding allowance certificate that shows the number of allowances claimed for federal income taxes. Federal form for employee’s withholding allowance certificate that shows the number of allowances claimed for federal income taxes. NC-4 North Carolina NC-4 North Carolina ****Both forms must be filled out, signed and filed with employer before 1 st paycheck is issued How to remember form: " W-4: B4 you’re paid, then work some more"

Factors that Determine the Amount Withheld for Federal Income Taxes Employee’s marital status Employee’s marital status Number of exemptions claimed by the employee Number of exemptions claimed by the employee Employee’s gross earnings Employee’s gross earnings *Complete W-4 for Payroll Department

How can you qualify “EXEMPT” for withholding? A. Did not have federal income tax liability in the previous year. B. Expect no tax liability this year. C. Has income of $700 or less including non-wage income such as interest on a savings account. D. Cannot be claimed as dependent on someone else’s tax return.

Exemptions/Allowances Determines the amount of income tax to be withheld for federal income taxes Determines the amount of income tax to be withheld for federal income taxes The greater the number of allowances claimed, the lower the amount of income tax withheld from earnings. The greater the number of allowances claimed, the lower the amount of income tax withheld from earnings. * If you have a lot of children, you need more money now, not as a refund after filing your tax return. * If you have a lot of children, you need more money now, not as a refund after filing your tax return.

Tax Table Shows the amount of taxes to be withheld from employees each pay period based on their filing status (single, married, head of household, etc.) Shows the amount of taxes to be withheld from employees each pay period based on their filing status (single, married, head of household, etc.) Computerized payroll software programs (spreadsheets) use tax tables to calculate payroll Computerized payroll software programs (spreadsheets) use tax tables to calculate payroll $ Tax due = $ Income (Base) x % Rate Amounts are set up on tax tables

Social Security Tax FICA - Federal Insurance Contributions Act Employers collect/match FICA for the federal government. 1. Retirement (Old Age) Programs 2. Survivor’s Benefits Programs 3. Disability Insurance Programs 4. Health Insurance- Medicare Program (for age =>65 years old) Provides income for RSDHI:

FICA Federal Insurance Contributions Act (1935) Federal Insurance Contributions Act (1935) Established the present social security system Established the present social security system AND the tax to fund it! Employers and employees both contribute Employers and employees both contribute DO NOT EXPECT FICA TO TAKE CARE OF YOU IN RETIREMENT! Save your own nest egg and supplement with FICA. DO NOT EXPECT FICA TO TAKE CARE OF YOU IN RETIREMENT! Save your own nest egg and supplement with FICA. How to calculate FICA – base x rate How to calculate FICA – base x rate –$ Income (base) x 7.65% (FICA rate)

FICA Taxes 1) Social Security 6.2% (1998 – maximum taxable earnings amount was $68,400) 2) Medicare 1.45% (no maximum taxable earnings amount) Total FICA Taxes = 7.65% withheld (deducted) from employee and matched by employer.0765 x 2 = 15.3% of every check sent to Federal Government Social Security account in your name

State and Local Income Taxes MOST states and many cities tax the earnings of the people who live and work within their boundaries MOST states and many cities tax the earnings of the people who live and work within their boundaries In some states and cities, tax rates are a set % of gross earnings, like social security. In some states and cities, tax rates are a set % of gross earnings, like social security. NC Department of Revenue collects income taxes NC Department of Revenue collects income taxes How do I calculate state tax? Rate x Base How do I calculate state tax? Rate x Base –$Income earned (base) x NC Rate (from tax tables)

Other Involuntary Deductions Garnishment of wages - court orders an employer to deduct from employee’s payroll Garnishment of wages - court orders an employer to deduct from employee’s payroll –Child support –Alimony –Lawsuit settlements –Old tax debts owed Maximum garnishment of wages = 25% of gross pay Maximum garnishment of wages = 25% of gross pay

Common Voluntary Deductions Health Insurance Health Insurance Dental Insurance Dental Insurance Vision Insurance Vision Insurance Life Insurance Life Insurance Disability Insurance Disability Insurance 401K, 403B, IRA retirement plans 401K, 403B, IRA retirement plans Charitable Contributions Charitable Contributions U.S. Savings Bonds U.S. Savings Bonds Union Dues Union Dues Credit Union Deposits Credit Union Deposits Credit Union Loan Payments Credit Union Loan Payments

Form W-2 For the previous calendar year* reports: For the previous calendar year* reports: –employee’s income earned and –how much tax was withheld-state & federal Employers are required: Employers are required: –To provide all employees a copy of the W-2 Form by January 31 st –To send info to IRS Legal evidence of employees earnings Legal evidence of employees earnings Used by individuals to file tax return Used by individuals to file tax return –Form 1040 or 1040 EZ –Due by April 15 th *Calendar Year = January 1-December 31

W-2 Form CLUE: How to Remember Form: Who gets it ? Who gets it ? 2 get it to compare* 2 get it to compare* –1. Employee –2. IRS (Internal Revenue Service) * IRS compares W-2 to income reported by employee on 1040 * IRS compares W-2 to income reported by employee on 1040 Errors may cause fines, penalties, jail, or prison time! Errors may cause fines, penalties, jail, or prison time!

Individual Income Tax Return All income taxes (federal, state, local) are withheld from payroll by estimates All income taxes (federal, state, local) are withheld from payroll by estimates The W-4 or NC-4 are used to calculate the estimated tax The W-4 or NC-4 are used to calculate the estimated tax After year end, 12-31, individuals must file a tax return (1040, or EZ) After year end, 12-31, individuals must file a tax return (1040, or EZ) Tax returns compares the estimated tax paid to the actual tax due Tax returns compares the estimated tax paid to the actual tax due Individuals either owe $ or get $ back. Individuals either owe $ or get $ back.

Corporate Tax Returns Corporations pay tax on their profit Corporations pay tax on their profit Profit = income - tax deductible expenses Profit = income - tax deductible expenses Use form 1120 to file return Use form 1120 to file return May file using a fiscal year not calendar year May file using a fiscal year not calendar year –Ex: A corp chooses fiscal year 4-1 through 3-31 –Spreads tax returns throughout the year, not just April 15 –Allows business to plan around a busy time of year