Copyright 2007 Thomson South-Western Chapter 2 Income Sources

Slide 2 Types of Earned Income Wages –Minimum wage –Overtime pay Salaries Tips and commissions 2-1 Earned Income and Benefits Some workers make most of their earnings from tips rather than wages.

Slide 3 Self-Employment An entrepreneur takes the risks of being self- employed or owning a business Advantages –You can make decisions about how to work or run the business –You can keep profits from your work or the business Disadvantages –Involves high risk –Often requires long work hours 2-1 Earned Income and Benefits

Slide 4 Employee Benefits Forms of pay other than wages or salary –Pay without work –Educational reimbursement –Perks –Insurance –Retirement plans –Profit-sharing and stock option plans –Health flexible spending arrangements 2-1 Earned Income and Benefits

Slide 5 Unearned Income Is money received from sources other than working in a job Is taxable Comes from private and government sources –Examples from private sources: dividends and interest 2-2 Unearned Income

Slide 6 Classification of Types of Income 2-2 Unearned Income Earned IncomeUnearned IncomeVariable Income Salaries and wagesDividendsBusiness profits CommissionsInterestRoyalties BonusesCapital gainsRents Professional feesGambling winnings TipsAlimony Social Security benefits Pensions Annuities Source: Internal Revenue Service, (accessed March 6, 2006).

Slide 7 Government Transfer Payments Money and benefits received from local, state, or federal governments In-kind transfer payments –Examples: food stamps, rent subsidies, and Medicaid services In-cash transfer payments –Examples: checks, debit cards, or other direct payments 2-2 Unearned Income

Slide 8 Taxes Are required payments to a government Are collected from many sources –Examples: income taxes, use taxes, and excise taxes Are paid on earned and unearned income 2-2 Unearned Income

Slide 9 Costs of Paying Taxes Paying taxes reduces disposable income Less money is left to spend or save Lower spending may affect the economy 2-2 Unearned Income

Slide 10 Benefits of Paying Taxes Taxes benefit taxpayers –Example: Social Security tax provides retirement benefits to workers Taxes benefit all residents –Examples: Highways, parks, government transfer payments 2-2 Unearned Income Taxes help provide parks for everyone to enjoy.

Slide 11 Focus on... Social Security Benefits Workers pay into the Social Security fund and receive a statement each year Payments are matched by employers The worker receives monthly benefit checks when retired 2-2 Unearned Income

Slide 12 Social Security Tax Is withheld by the federal government Provides a system of old-age, survivors, and disability insurance Requires employers to verify that workers are eligible for employment Requires workers to complete parts of Form I-9, Employment Eligibility Verification 2-3 Taxes and Other Deductions

Slide 13 Taxes and Disposable Income Wages, salaries, and business profits are taxable Some unearned income is taxable Lower taxes result in higher disposable income Higher taxes result in lower disposable income 2-3 Taxes and Other Deductions

Slide 14 Required Deductions Money withheld from a worker’s paycheck –Examples: income tax, Social Security tax, and Medicare tax Gross pay minus taxes and other deductions equals net pay 2-3 Taxes and Other Deductions

Slide 15 Sample Paycheck Stub 2-3 Taxes and Other Deductions

Slide 16 Income Taxes Are withheld according to income amount and exemptions claimed on Form W Taxes and Other Deductions

Slide 17 Medicare Tax Is withheld by the federal government Pays for medical care for retired persons and those who receive Social Security benefits Is paid by workers and employers 2-3 Taxes and Other Deductions

Slide 18 Workers’ Compensation An insurance plan Pays medical and disability benefits to workers who are injured or contract diseases on the job Laws and programs vary by state Premiums are paid primarily by employers 2-3 Taxes and Other Deductions

Slide 19 Optional Deductions Payments for items other than taxes that are subtracted from a worker’s pay –Examples: health insurance, vision insurance, savings plan, and retirement plan 2-3 Taxes and Other Deductions Retirement plans allow many retired workers to live comfortably.

Slide 20 Federal Tax Filing Whether U.S. citizens must file a federal income tax return depends upon –Gross income –Filing status –Age –Whether you are a dependent 2-3 Taxes and Other Deductions

Slide 21 Tax Forms 2-3 Taxes and Other Deductions Form W-2Used to report the taxable income a worker received during the calendar year Form 1040EZDesigned for use in filing income taxes by single and joint filers with no dependents Form 1040AA two-page form designed for use in filing income taxes Allows more options for income and deductions to be entered Form 1099-INTShows the interest income earned during the year at one bank