Chapter 2 Income, Benefits, and Taxes

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

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

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

Self- Employment Small Business Advantages Disadvantages 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). 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

What Are Employee 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 2-1 Earned Income and Benefits Slide 6

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

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

What Types of Taxes Do You Pay? 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 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.

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

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

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

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

Methods for Paying Employees 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 Payroll Card A payroll card electronically carries the balance of the employee’s net pay

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

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…

What Are Paycheck Deductions? A deduction is money withheld from a paycheck. Required deduction examples: income tax, social security tax, Medicare tax 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 Slide 17

30 hours x $6.00/hr = $180.00 for 2 weeks 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? # hours worked x wage = gross pay 15 hours x $6.00/hr = $90.00/week What is Miss Patty Paycheck’s gross pay for a two week pay period? 30 hours x $6.00/hr = $180.00 for 2 weeks

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

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

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

FICA (Federal Insurance Contribution Act) 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

Social Security 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

Medicare 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

Tax Forms – see pages 66-68 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) 2-3 Taxes and Other Deductions Slide 25

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