1. The Paycheck, Taxes, Employee Benefits, & Insurance
High School Financial Planning Program
Lesson 3-3: Pay and Taxes
The Paycheck, Taxes, Employee Benefits, & Insurance
Display this slide as you prepare to introduce this lesson.
©2012 National Endowment for Financial Education |

2. Gross and Net Pay
Gross Pay – is the total amount of income from wages and salary before payroll deductions.
Net Pay - the pay (money) you receive after deductions have been subtracted from your gross pay. (also called “Take-home pay”)

3. Payroll Deductions Amounts subtracted from Gross Pay
Taxes (Mandatory Deductions)
Federal and State Income Taxes (deposits)
Medicare Tax (funds public insurance for 65 or older)
Social Security Tax (workers contribution to cover retirement benefits and other security payouts)
Other Deductions (Voluntary Deductions)
Retirement savings (401K)
Health Insurance, Dental Insurance, Vision Insurance
Other (Charity, Stock Purchase Plans, etc.)
Gross Pay less Total Deductions = Net Pay

4. High School Financial Planning Program
Lesson 3-3: Pay and Taxes
Kevin’s Paycheck
Kevin is a valet. How much did Kevin earn? Last month he worked 60 hours at $6.50 an hour. How does this compare with what he actually takes home?
Calculating Income
Kevin’s Monthly Pay
Regular Pay $ +
Tips $ =
Gross Pay $ -
Payroll Taxes $
Other Deductions $
Net Pay $
Calculating Income
Kevin’s Monthly Pay
Regular Pay +
Tips =
Gross Pay -
Payroll Taxes $
Other Deductions
Net Pay
Student Guide, page 24
Before showing the students Activity 3.8, tell them to calculate how much Kevin earned and compare their answers with a neighbor. Ask the students if he will receive all of that money when he cashes his paycheck. When student responds that he won’t receive all of the earnings, ask for reasons why his actual “take-home pay” is less than what he earned. Reference the responses later in the lesson as you discuss payroll deductions.
Wrap up this task by having the students complete Activity 3.8: Check it Out, either individually or as a whole class. Point out that “Net Pay” is the actual “take-home pay” that Kevin has available to use as he wishes for saving, investing, or spending.
©2012 National Endowment for Financial Education |

5. Federal Income Tax Tax is determined by? Paid by? Helps fund?
Earned and unearned income (interest & dividends)
Higher income = higher tax rate percentage (progressive tax)
55% adults living in the U.S.A. 45% of adults pay no Federal income tax due to our progressive system
Operations of federal government
Government programs
education
defense
disasters relief
roads

6. State Income Tax Tax is determined by? Paid by? Helps fund?
Earned and unearned income
Higher income = higher tax rates applied (progressive)
Those living in states with a state income tax
7 states have no state income tax
Varies by state
Examples:
State highways
Operations of state government
Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no state income tax!

7. Payroll Taxes: Social Security + Medicare Taxes
FICA Taxes – Two separate taxes on earned income that supports the Social Security and Medicare programs
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
Employers must match taxes paid at 100%.
Social Security program
Medicare program

8. What is Social Security?
Purpose
Tax charged
Income for:
Retirees (main payout)
People with disabilities
Other qualified payouts
6.2% of earned income
Up to an annual maximum of $132,900 (after that point, SS is not deducted from pay for the rest of year).
May begin collecting social security retirement income between y/o.
Each year you wait to collect social security past age 62 your payment goes up 8%

9. What is Medicare? Purpose Tax charged
Tax helps pay for health care for senior citizens
Medicare eligibility starts at age 65.
Covers hospitalization, doctors, surgeries, and prescription drugs (but you still have to pay a portion of cost once you are eligible).
1.45% of earned income (no income limit)
Additional charge of .9% of earned income over $200K.

10. Employers also pay Social Security and Medicare Tax
A 100% Match
Employer pays $200 in payroll taxes to the Federal government (you pay half & employer pays half)
Employee contribution:
$100
Employer contribution:
$100
Self-employed people pay both the employee and employer contributions!

11. W-4 Withholding Certificate
High School Financial Planning Program
Lesson 3-3: Pay and Taxes
W-4 Withholding Certificate
Student Guide, pages 22-23
Read through the Student Guide text (page 22) with students. Make sure they understand the choices they have to make when filling out an IRS Employee’s Withholding Allowance Certificate (Form W-4). Explain that deciding what to claim for allowances is a financial decision they will make every time they fill out the form. What they record in lines 3, 5, 6, and 7 will impact the amount of federal income tax that is deducted from their gross pay. Guide students as they complete Activity 3.7: Get the W-4 Right.
Note: Info Sheet: W-4 Form is provided for reference. Ideally, a worker should claim withholding allowances in such a way that a sufficient amount of taxes should be withheld throughout the year to avoid the need to come up with a big chunk of money to pay additional income taxes owed at the end of the year. Reversely, there should not be too much withheld so a large refund is received when filing taxes—this is money a person could have had in hand for saving, investing, or spending rather than having it held by the government during the year. (This is a good time to review how the time value of money applies in this situation if you have already covered the concept in Module 4: Investing.)
Explanation: Most people who are single and have no children will claim either “0,” “1,” or “2” allowances on their W-4 form. With a higher number of allowances claimed, a lower amount of income taxes will be withheld from paychecks. Someone who expects to not owe any income tax, such as a student who works short-term in the summer, might claim “exempt” on the W-4 Certificate to increase the net pay received each paycheck rather than wait for a tax refund at the end of the year. However, an employee needs to make sure to have enough money to cover any taxes owed when taxes are due on April 15. The most convenient way to plan for tax payments is to pay a little at a time from each paycheck rather than all at once at the end of the year.
©2012 National Endowment for Financial Education | Lesson 3-3: Pay and Taxes
©2012 National Endowment for Financial Education |

12. W-4 Form What it does
Tells Employer how much to withhold from paycheck for federal and state income taxes
Allowances Claimed
Can claim 1 for Single, 2 for Married
Can claim 1 for each dependent (child & certain others) reliant on your paycheck
The lower the allowances claimed, the Higher the Taxes Withheld (and vice versa)
As a student you can claim 1 or “exempt”
Always fill out a W-4 at the start of a job

13. Let’s Look at Employee Benefits

14. What is an Employee Benefit?
Various non-wage compensation paid by the employer in addition to their salary or wage. These incentives retain talented people for a company. Benefits approximate 30% of Salaries!
Examples:
Medical Insurance (paid by employee & employer)
Dental (paid by employer and employee)
Life Insurance
Disability protection (short term and long term)
Retirement (401K Plan)
Day care
College Tuition reimbursement (Masters, Doctorate,etc.)
Paid Sick Leave /vacation

15. Property Tax
Property tax - a tax on property, such as land, buildings, and motor vehicles
Tax is determined by?
Paid by whom?
Helps fund?
Percentage of property value
Amount paid varies depending upon where you live
Property owners
Public Schools
Expenses of state and county governments

16. Property Taxes: A Closer Look
On Real estate or personal property
A local (County Tax)
The property tax rate is set by the local Government and assessed against the assessed value (fair market value) of the property.
Money used to fund public school system and other local (County) expenses.
Usually billed once or twice per year.
If you don’t pay, the County may foreclose (sell) your home to pay off the tax (a lien on your home).

17. Sales tax – tax on purchased goods and services
Tax is determined by?
Paid by?
Helps fund?
A percentage added to the original price of an item
$1.00 item charged 6% sales tax = $1.06
Anyone who purchases an item subject to sales tax
Some states don’t have sales tax
Expenses of state and local governments
Does your state have a sales tax?

18. Excise Tax Tax is determined by? Paid by? Helps fund?
Excise taxes – taxes collected from the seller or retailer and as such often remain hidden in the price of a produce or service
Tax is determined by?
Paid by?
Helps fund?
Purchase of certain items:
Gas
Tanning salons
Cigarettes
Alcohol
Furs
Anyone who purchases certain items
Tax embedded in the price.
Varies by location
Usually the tax is on “controversial goods”
Expenses of federal, state and local governments

19. Protect Your Assets and Your Standard of Living!
Types of Insurance
Protect Your Assets and Your Standard of Living!

20. Importance of Insurance
Emergency savings - at least six months of expenses set aside to cover costs of unexpected expenses
Risk - chance of financial loss from an event that cannot be entirely controlled
is managed by
Insurance – a financial product purchased by many people facing common risk to protect against the risk of larger losses
What are examples of unexpected events that may result in a financial loss?

21. Insurance Terms
Policy - A contract between the insurance company and the insured that states the exact terms of the policy
Coverage - The risks covered and amount of money paid for losses under an insurance policy
Policyholder - Person who owns the insurance policy
Premium - Money paid to purchase the policy
Experts say that buying insurance is buying financial security. Do you think this is true? Why or why not?

22. The Importance of Deductibles
Deductible: the amount of money you have to pay before insurance “kicks in”.
Reduces cost of your insurance policy by making you pay a portion.
Causes you care to be safe about your property, negligence, and/or health because part of the expense comes out of your pocket.
Key principle: The higher the deductible, the lower the premium!
Discuss auto deductibles of $250, $500, and $1,000. Pick the highest deductible you can afford!

23. The Benefits of Insurance
Types of Insurance
Property & Liability
Payments received from an insurance policy can far exceed the premiums paid
Benefit-Provides financial security and peace of mind
Life
Health
Long-term Care
Disabilityy
Why is the best outcome to have insurance but never collect on it?

24. The Insurance Process
Claim – a formal request to an insurance company asking for a payment when the policyholder has an accident, illness or injury
Event occurs resulting in loss
Deductible – the out-of-pocket money paid by the policyholder before an insurance company will cover the remaining costs attributed to the loss
Remaining amount owed is paid by a co-insurance % (if applicable)
Policyholder makes claim to insurance organization
Co-insurance – requires the insured individual to pay a fixed percentage of the loss after the deductible has been paid
Insurance organization determines if event is covered by policy
If so, policyholder pays a deductible

25. You do the Math!
Carlos was involved in an automobile accident that resulted in $4,000 worth of damage to his car.
How much does Carlos pay and how much does the insurance organization pay?
Carlos has a property and liability insurance policy with a $500 deductible and 10%
co-insurance
How much does Carlos pay?
$850
How much does his insurance organization pay?
$3,150

26. Sources of Insurance Employer Individual Government
In most cases, individuals acquire insurance from a combination of sources
Long-term care, property and liability insurance
Employer
Special programs for those who qualify and during catastrophes
Health, disability, and occasionally life insurance
Individual
Government
If an employer does not provide insurance, it may be acquired individually

27. Government Programs
Provide basic insurance as a part of the social safety net to protect citizens from economic hardship
Social Security, Medicare, Medicaid
Many programs require a work history and employer provided participation to be eligible
Unemployment insurance, worker’s compensation
Can address specific catastrophes
Hurricanes, floods, wild fires, etc.

28. Mental health treatment
Health Insurance
Provided by
And/or
Employer
Health insurance - provides money to pay for health care
Government
Individual
If dollars are limited, health insurance is extremely important to protect against high medical bills
Risks Covered
Mental health treatment
Hospital bills
Preventative care
Doctors’ visits
Vision care
Prescription drugs
Medical procedures
Dental care

29. Life Insurance Policies: A Closer Look
Term Life Insurance Policy
Less expensive than a Whole Life Policy (next slide)
You pay an annual premium based on your age, health, and amount of “death benefit” or “face value” desired for your chosen beneficiary.
Has a specific duration or term with most common terms being 10,15,20, or 30 years.
If you die within the covered term, your beneficiary is paid the value of the policy (ie, $250K, $1M, etc.)
If the term expires, you are no longer covered.
The premium is fixed per year over the term.

30. Life Insurance Policies: A Closer Look
Whole Life Insurance Policy
A policy that lasts your entire lifetime unless you “surrender” or cancel the policy.
A combination insurance product and savings product in that your annual premium is allocated between life insurance and savings with interest.
Each policy has a quoted “cash value” that grows over time to that value. The “cash value” grows based on amount of premium payments and the interest rate and may be drawn upon before death. At death, the full “cash value” and “death benefit” (face value) would go to your beneficiary.

31. What if a Person Cannot Work or live Independently?
Disability insurance
Long-term care insurance
Payment for extended nursing care when a person cannot live independently (but doesn’t need to be hospitalized)
Payment to replace earnings during times when workers cannot work due to illness or injury
Why are both disability and long-term care insurance important?
Provided by employers, individuals, and/or government
Provided by individuals

32. Property & Liability Insurance
Two parts
Property insurance - payment to insured person if his/her property is damaged or destroyed by an accident
Pays for loss to insured person
Liability insurance - payment to other person if other’s property is damaged and/or person is injured.
Pays for property damage or injury to others
Provided by individuals

33. Types of Property & liability Insurance
Automobile insurance - payment for liability to others and property damage on your own car.
If a person drives an automobile, automobile liability insurance is required by law
Homeowners insurance - payment to cover liability losses and damage/loss of home structure and its contents
Renters insurance - payment for damage/loss of property in a rental unit in addition to liability losses

34. You are having a baby and need medical care
What Covers This Risk?
You are having a baby and need medical care ?

35. What Covers This Risk?
You are unable to work for six months and need help paying your expenses while you’re out of work ?

36. What Covers This Risk?
You are elderly and need assistance from medical professionals to continue living at home ?

37. Your home is destroyed by a tornado and you need to rebuild
What Covers This Risk?
Your home is destroyed by a tornado and you need to rebuild ?

38. The car you are driving causes an accident that injures someone else
What Covers This Risk?
The car you are driving causes an accident that injures someone else ?

39. A sudden death of a family member results in loss of income
What Covers This Risk?
A sudden death of a family member results in loss of income ?

40. In review… Insurance is an important part of a financial plan
Insurance is not intended to make an individual better off than before the event
Insurance is an important part of a financial plan
Insurance may be acquired from multiple sources
Even with insurance, an individual should still have funds to pay the deductible and co-insurance
There are several types of insurance for specific purposes