5 What Are Payroll Taxes?Money taken from your paycheck to pay for services you may directly receive (now or in the future)Called Federal Insurance Contributions Act (FICA) TaxesSince you may receive direct benefit from these services, it is a form of insuranceFICA taxesSocial Security (FICA-SS)Money you will receive when you reach retirement (currently age 65)Amount of benefit you will receive is capped, so you only pay FICA-SS on a maximum of $110,100 (in 2012) of earningsCurrent rate: 6.2% of all earnings below $110,100Look up and revise maximum FICA-SS every year as necessary
6 Your employer is required to match your FICA contributions MedicarePays for health care for those individuals who qualify for itIntended primarily for retirees over age 65Current tax rate: 1.45% of all earningsYour employer is required to match your FICA contributionsYou pay 7.65% of your income in FICA contributionsYour employer has to provide an identical amount from its earnings to the governmentThe cost of your labor to an employer is more than just the wage you earn!Look up and revise Medicare tax rate annually as required
7 What Is Income Tax?Tax the government collects on each income earner to use for government servicesTaxes withheld from each of your paychecks and sent by your employer to the Internal Revenue Service (IRS)Government agency in charge of collecting taxesAmount withheld varies based on tax allowances claimed on W-4
8 A Note on Tax Allowances When you get a job, you will fill out a W-4 form claiming how many allowances you want on your income tax withholdingCan get 1 allowance for each member of your householdAdditional allowance possibleThe number of allowances will determine how much is withheld from each paycheckThe more allowances, the less withheld from your paycheckIRS publishes withholding tables telling employers how much to withhold from your paycheck based on your earnings & number of allowancesIntent is to minimize the amount you may have to pay in taxes at the end of the year when you file your tax returnShow W-4 to class. Look up latest W-4 annually and revise as necessary.
9 US Federal Tax System Progressive income tax The more you make, the larger percentage of your income you pay in income taxTax rate determined by tax bracketsDifferent parts of your taxable income are taxed at different rates
10 Taxable IncomeGross Income (total of all income earned through work, investments, etc.) minus allowed tax deductionsTax deduction – something the IRS allows you to deduct off of your incomeTax deductions reduce your taxable income
11 Types of Tax Deductions Standard Deduction – flat amount set annually by the IRS$9,750 for tax year 2012Itemized deductions – sum total of all allowed tax deductions (charitable contributions, property taxes, mortgage interest, etc.)Can only use one or the other, not bothUsually use larger amount of the twoCannot itemize deductions if using 1040EZ
12 Example of Taxable Income Gross Income(sum total of all income earned through work, investment, interest on savings accounts, etc.)$35,000Standard Deduction$9,750Taxable Income(gross income – standard deduction)$25,250
13 Tax Brackets 2012 Single Adult Taxable Income Earned BetweenTax Rate$0 - $8,70010%$8,700 - $35,35015%$35,350 - $85,65025%$85,650 - $178,65028%$178,650 - $388,35033%$388,350 +35%Look up annually and revise as necessarySource:
14 Taxable Income Between ExampleGross Income$75,000Taxable Income$65,250Taxable Income BetweenAmountTax RateTax Liability$0 - $8,700$8,70010%$870.00$8,700 - $35,350$26,65015%$3,997.50$35,350 - $85,650$29,90025%$7,475.00Total Tax Liability$12,342.50Effective Tax Rate16.46%Change annually as tax brackets and percentages change
15 When Do I Pay My Taxes?Employer pays your taxes to the IRS throughout yearAfter end of the calendar year, you must determine if you have paid enough, too little, or too muchToo little: must pay moreToo much: you will get a refund
16 You must file a tax return every year with the IRS showing How much you earnedHow much you paid in income taxHow much you should have paid in income taxandWhether you still owe more or should get a refundDeadline: April 15 (or April 16 or 17 if April 15 is on a weekend)Do tax return as early as possible to determine if getting refund or owe moneyIf you owe money, this gives you more time to come up with the money you oweFile as early as possible if getting refund
17 What Do I Need To File My Tax Return? Appropriate 1040 form (1040, 1040A, 1040EZ)W-2s from all employers from previous year1099-INTs from all interest-earning accounts1099-DIVs from all investments for which you were paid dividends1099-MISC for all other sources of income not covered by previous formsYou should receive all forms by the end of January each yearReceipts/documentation for deductions (if itemizing)Not needed if using 1040EZ
18 1040, 1040A, 1040EZ: Which One To Use? 1040EZ 1040A & 1040 Taxable income below $100,000Filing status Single or Married Filing JointlyUnder age 65 and not blindNot claiming any dependentsInterest income $1,500 or lessNot claiming any additional deductions for real estate taxes, taxes on purchase of new motor vehicle, or disaster lossesMost appropriate form for teenagers and young adults1040A & 1040For more complicated tax situationsCheck with IRS or accountant to see which form you need to useCheck IRS Web site (link in slide) to see if anything has changed.
19 Steps To Filling Out 1040EZ Step 1: Determine Gross Income Add up income on all W-2s and 1099sThere are separate lines on 1040EZ for thisStep 2: Determine Taxable IncomeFigure out Standard Deduction (will be less than normal if you are claimed on someone else’s tax return)Subtract Standard Deduction from Gross IncomeStep 3: Determine How Much You Paid in TaxesAdd up all taxes paid shown on W-2s and 1099s
20 Step 4: Determine How Much You Should Have Paid in Taxes Based on your Taxable Income (the smaller amount), look up your tax liability in the tax tables in the 1040EZ InstructionsStep 5: Determine Your Refund or Amount You OweIf the amount you paid is more than the amount you should have paid, you will get a refundIf the amount you paid is less than the amount you should have paid, you will owe the IRS moneySee 1040EZ extract from 2006 to show them tax tables. These tax tables should be given to them along with VBPF Lesson 12 Computer Exercise; have them use the tax table to determine the tax liability on the taxable income instead of trying to do the calculation.
21 How Do I File My Taxes Mail in Paper Copy of All Tax Documents Online Takes longer for IRS to processDelays getting your refund if you are due oneOnlineMay be able to file directly from IRS Web siteCan use tax software (TurboTax, TaxCut, etc.) to file electronicallyNormally pay fee to do this
22 How Can I Receive My Refund? Paper Check Mailed to YouTakes longer to receive refundDirect DepositQuickest way to receive refund