Copyright 2007 Thomson South-Western Unit 5 Taxes Building Your Future

Chapter 5 Taxes Key Terms Taxes Sales tax Excise tax Property Tax Assessed value Market vale Income Tax Exemptions Personal exemption Dependent exemption Deduction Charitable contribution Itemized deduction Taxable Income Progressive tax rates US Treasury Internal Revenue Service (IRS) Payroll taxes Social Security Medicare Credit Child tax credit Refund Slide 2

More Terms Gross Pay Net pay Voluntary deductions Involuntary deductions Pay period Slide 3

Different ways people get paid Hourly wage Overtime Salary Commission Salary plus commission Tips Piecework rate Self employment income Slide 4

Hourly Wage is an amount of money paid to an employee at a specified rate per hour worked. The number of hours worked multiplied by the hourly wage equals the gross earnings for the pay period Minimum wage is the lowest pay rate allowed by law for each hour of work. Each state has set a rate higher than the federal rate. Go to US Dept of Labor Slide 5

Overtime Pay Employers are required to pay overtime when employees covered by certain state and federal laws work more than 40 hours per week. The overtime rate, set by the Fair Labor Standards Act of 1938, is 1½ (1.5) times the employee’s regular hourly pay rate. Example A worker who makes $8/hr.may make $12/hr. for overtime

Salary A fixed amount of money paid to an employee for each pay period An employee who is paid a salary earns the same amount regardless of the number of hours worked during the pay period Slide 7

Tips and Commissions Tip is money often a percentage of the total bill or a gift given to a person for performing a service Commission is an amount paid to an employee based on a percentage of the employee’s sales Some salespeople earn a base salary plus a commission or bonus on the amount of their sales Slide 8

Piecework rate You earn a set amount for each piece produced or for each piece produced that exceeds the expected level of production. Slide 9

Pay period How often you will be paid –Weekly every week –Biweekly every 2 weeks –Semimonthly twice a month –Monthly once a month Slide 10

Self-Employed A person who takes the risks of being self-employed and owning a business is called an entrepreneur. Profit is the amount left after all costs are deducted from the income of a business. Slide 11

“You can’t escape death and taxes” Ben Franklin Slide 12

What are taxes? Are you a taxpayer? Taxes – Fees charged by the government on products, activities or income Paid by taxpayers – A person who pays a tax to national, state, county or municipal (city/town) governments

Community Community - a group of people working together for a common good United States State County City/ town

What are benefits of being a part of these communities? Roads Libraries Military for national security Public schools Police and fire departments Recreation (parks, trails) ?

“You are better off being in a community than by yourself” As a community member you receive many benefits you could not pay for individually Taxes are a way that members of a community provide for one another

How do taxpayers pay taxes? Income Tax Payroll Tax Property TaxSales Tax Excise Tax

Income tax Income tax – tax paid on the money one earns from working and on unearned income Earned income -money earned from working for pay Unearned income - income received from sources other than employment Example: Wages and salaries earned from employment Example: Interest earned from a savings account

Components of income tax Federal income tax State income tax Income tax

Voluntary vs. Involuntary Deductions from your paycheck Voluntary vs. involuntary (optional vs. mandatory) Involuntary – Federal & State Income Tax Social Security and Medicare (FICA Tax) Voluntary- Health benefits, pension contributions, bonds, union dues, etc. Slide 20

Federal Income Tax Tax is determined by? Paid by?Helps fund? Earned and unearned income Higher income = More tax paid Majority of people living in the U.S. Operations of federal government Government programs Education Defense of the nation Disaster relief

State Income Tax Tax is determined by? Paid by? Helps fund? Does your state have state income tax? Earned and unearned income Higher income = More tax paid Those living in states with a state income tax Not all states have a state income tax Varies by state Examples: State highways Operations of state government

Payroll Tax Payroll tax – A tax on earned income that supports the Social Security and Medicare programs (also known as FICA) Tax is determined by? Paid by?Helps fund? A set percentage of earned income Deducted out of paycheck (except for self- employed) Individuals who earn income from working for pay Employers Social Security program Medicare program

What is Social Security and Medicare? Social security is a federal government program funded through payroll taxes; designed to provide retirement and disability income for those meeting the specified criteria. Medicare is a federal government program funded through payroll taxes; pays for health care expenses for citizens over age 65 or those who meet other criteria Slide 24

What is Social Security? PurposeTax charged Income for: Retirees People with profound disability Children who have lost a parent A person with children who has experienced the death of a spouse 6.2% of earned income) Up to an annual maximum 2012 $110,00 Both the employer and employee pay equal amount

What is Medicare? PurposeTax charged Helps pay for health care for senior citizens 1.45% of earned income No limit on all your earnings Both the employer and employee pay equal amount

What is the difference between income tax and payroll tax? Income TaxPayroll Tax Paid on both earned and unearned income Paid on only earned income Amount paid depends on many different factors but increases as income increases A set percentage of earned income is paid Funds many different operations and programs of the federal government Funds the Social Security and Medicare programs

Employers also pay Social Security and Medicare Match their employees tax contributions Self-employed people pay both the employee and employer contributions Employee contribution: $100 Employer contribution: $100 Employer pays $200 in payroll taxes to the federal government

How are tax rates determined? Determined by public representatives (city councils, county commissions, state legislatures, Congress) Elected by voters Taxpayers = voters Work as a voting group to elect representatives who will represent the majority

Excise Tax State or federal tax placed on non-essential consumer goods or consumption items Tax is determined by? Paid by?Helps fund? Purchase of certain items: Gas Hotel rooms Airline tickets Cigarettes Alcohol Often included within the price of these items Anyone who purchases certain items Varies by location Expenses of state and local governments

Sales Tax a tax imposed by many states, counties and cities on items purchased in retail stores Tax is determined by? Paid by?Helps fund? Does your state have sales tax? A percentage added to the original price of an item $1.00 item charged 7% sales tax = $1.07 Anyone who purchases an item charged with sales tax Some states don’t have sales tax Expenses of state and local governments

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Property Tax Property tax - a tax on property, such as land, buildings (including homes), and motor vehicles Tax is determined by? Paid by who?Helps fund? Percentage of property value Amount paid varies depending upon where you live Property owners o Fee to license car is a property tax Schools Expenses of state and local governments

property tax tax paid by people who own items such as homes, land, and vehicles to the city and/or county where the property is located assessed value the amount the property is worth for tax purposes as determined by city or county assessors market value what you would receive if you sold the property Slide 34

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Taxes and Money Management Why do you think understanding taxes is an important part of money management? Taxes play a role in both earning and spending One of the largest expenses for many people

Conclusion Without taxes it would be hard to pay for many of the benefits of being a member of a community Taxes are charged in many different forms The amount of taxes you pay and what you pay those taxes on will vary depending upon where you live and your income Understanding taxes is an important part of money management