Consumer Education Chapter 5 & Section 16.3 Unit 3: Taxes Consumer Education Chapter 5 & Section 16.3

Types of Pay Salary Wages Set amount of money earned by an employee per year or other fixed length of time Wages Employee earnings that are paid by the hour, day, or item Piecework – work for which wages are based on the number of items or pieces produced

Types of Pay (Continued) Commission A fixed % or amount of profit given to an employee in exchange for making a sale Tips Money given to an employee by customers in exchange for a service

How Employees Are Paid Time Direct Deposit Paycheck Weekly (52 paychecks per year) Bi-weekly (26 paychecks per year) Semi-monthly (24 paychecks per year) Monthly (12 paychecks per year) Direct Deposit Paycheck

Regulations Affecting Pay Equal Pay Minimum Wage Overtime

Types of Benefits Insurance benefits Savings and retirement benefits Vested – entitled to some or all of his or her money in the retirement plan when leaving the company Other Benefits Paid holidays Sick leave Vacation Child Care Education

Payroll Taxes Tax – required payment to a local, state, or national government Placed on income earned by individuals Assessed based on the individual’s total earnings and the tax laws that apply to that type of income Paid to the government by individual employees and their employers

Income Taxes Taxes you pay on most types of income you receive Federal Income Tax & State Income Tax State – tax structures vary Federal - Not a fixed percentage of income Dependent upon the taxpayer’s financial and family situation Range from 10 to 35 percent of Taxable Income

Income Tax (continued) Federal Insurance Contributions Act (FICA) Taxes more commonly known as Social Security and Medicare These tax amounts are matched by employers (IRS receives double) Social Security Tax – 6.2% Medicare Tax – 1.45% These programs will be discussed in greater detail at the end of the Tax Unit

Income Tax Withholding Withholding – your employer collects payroll taxes by deducting money from your wages Internal Revenue Service (IRS) – the federal agency that collects and regulates taxes Withholding allows the government to collect taxes at a steady rate and spreads out taxpayer payments over time

Info on a Pay Stub Identification Earnings Deductions Gross Income Deductions Tax withholding Other deductions Totals and Net Income

Income Tax Withholding Form W-4 Employee’s Withholding Allowance Certificate 1. Your Personal Information Name, Birthdate, Address, Social Security Number 2. Exempt Status You may be excused from paying taxes – this is rare 3. Number of Allowances you are claiming These reduce the amount of tax withheld from your paychecks You may claim 1 allowance for yourself and 1 for each person dependent on your income from this job

W-4 FORM

Tax Withholding Tables for Employers

Do you claim 0 or do you claim 1? PAYCHECKS REFUND ↓ ↑ 1

Income Tax Returns A set of forms that taxpayers use to calculate their tax obligation Getting Ready to File a Tax Return Do I need to file? What materials do I need? Which form do I use? When do I file? How do I file?

Getting Ready for Tax Time Do you need to file? Most workers are required to file a tax return, but there are exceptions If you have income above a minimum amount set each year by the IRS, you must file a return For tax purposes, income is more than just your wages What materials do you need?

Getting Ready for Tax Time Form W-2 Wage and Tax Statement Your employer totals up all of your gross wages and all amounts of taxes withheld from your paychecks for the calendar year You must receive a W-2 for each job that you held during the calendar year You must receive all W-2’s by January 31st

W-2 FORM

Getting Ready for Tax Time Form 1099-INT Interest Income Your bank or investment company totals up all of your interest earned from your investment accounts for the calendar year Savings, Stocks, Bonds, Mutual Funds, etc. All interest income is taxable You must receive a 1099 for each investment that you held during the calendar year You must receive all 1099 forms by January 31st

1099 FORM

Income Tax Forms (Returns) There are three versions of the IRS Income Tax Return 1040EZ 1040A 1040 (the Long Form) When do I file? By April 15th most years “Tax Day”

Completing Your Tax Return Filing Status Single or Married Exemptions (individuals who rely on the taxpayer’s income) – personal information entered Exempt – amount of income excused from tax, based on the number of people/dependents in the household Dependent – someone who is supported by a taxpayer’s income (claimed on W-4: Withholding Allowances)

Completing Your Tax Return Income You must list your income from ALL sources W-2’s, 1099’s, etc. Adjustments – all income added together, however you may get to subtract certain items as well Example: amounts contributed to retirement accounts & student loan interest

Completing Your Tax Return Deductions Expenses you can legally subtract from your income before calculating your tax amount Standard Deduction A set amount that the IRS allows all taxpayers to deduct without listing any actual expenses Itemized Deductions Must use the 1040 Long Form & complete Schedule A The amounts actually spent by a taxpayer on tax-deductible expenses during the year (would be greater than the allowed standard deduction amount)

Completing Your Tax Return Exemptions – Subtract them - 1040A & 1040 ($4,000 in 2015 tax year) Taxable Income The portion of your income that is actually subject to income tax Tax – from Tax Tables Tax Credits Subtracted directly from the amount of tax owed Ex. Education costs, Child Care costs, Other taxes paid Final Calculations

Electronic Filing Rather than mailing your income tax return, you can send it electronically through a bank, IRS web site, or a company whose tax preparation software you’re using

Rationale for Taxation Purposes of Taxation Government revenue - to finance the government’s roles in our economy Also to influence behavior Fund public goods and services Roads Schools National Defense Regulatory Agencies

Sources of Government Revenue

2 Tax Principles Benefit principle Ability-to-pay principle Those who use (or benefit from) a public good or service should pay for it Ability-to-pay principle Those who have larger incomes should pay a larger share of what they receive

Relationship of taxes to INCOME Progressive tax (Graduated Tax) Takes a larger % of the income of high-income people than of low-income people Ex. Federal income tax Regressive tax Takes a larger % of the income of low-income people than of high-income people Proportional tax (Flat Tax) Taking the same % out of everyone’s income Ex. State income tax

The Taxes People Pay Income Taxes – Federal and State Social Security Taxes (FICA) Sales Tax Property Taxes Excise Taxes Estate and Gift Taxes Business and License taxes Customs Duties and Tariffs

Government Spending

Government Assistance Unit 3: Taxes Chapter 16: Section 3

Redistribution of Income Also known as Redistribution the transfer of income and of wealth from some individuals to others by means of a social mechanism such as taxation, welfare, public services, or monetary policies Example: Social Security One of the government’s roles in our economy A unique quality of the U.S. economy

Welfare Government programs that provide money, medical care, food, housing, and other necessities for people who cannot afford them Also known as Public Assistance To be eligible, a family’s income and other financial resources must be near or below the poverty line Poverty line is established by the Federal Government

Reason for Poverty Lack of skills to earn a living income Chronic illnesses Victims of crime Families of convicted felons Immigration Children (largest group living in poverty) – Single-parent households

Welfare (Public Assistance) Programs Temporary Assistance for Needy Families (TANF) Food Stamps Supplemental Security Income (SSI) Women, Infants, and Children Program (WIC) Head Start National School Lunch Program Public Housing Social Security (Disability and Survivor benefits) Unemployment Compensation