1.  5.1 Taxes and Your Paycheck

2.  Payroll Tax  Income Tax  Federal Insurance Contribution Act (FICA)  Withholding  Gross Income  Net Income  Form W-4  Internal Revenue Service (IRS)  Allowance

4.  Payroll taxes are placed on income earned by individuals. Payroll taxes are paid by individual employees and their employers.

5. FICA Tax: Federal Insurance Contributions Act : The law that requires workers and their employers to contribute to Social Security and Medicare. 1. Social Security Tax: provides benefits for retired workers and their dependents as well as for the disabled and their dependents. (Also referred to as the FICA tax.) The Social Security tax rate is 6.2%. 2. Medicare Tax: used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65. The Medicare tax rate is 1.45%.

6.  Income Taxes: are taxes you pay on most types of income you receive.  Income taxes are NOT a fixed percentage. (refer to chart on next slide)  Income taxes vary depending upon each taxpayer’s financial and family situation.  You are responsible for calculating the amount of federal & state income tax you owe.

7. Each tax rate applies to a range of income, which is called a tax bracket. Each tax rate applies to a specific range of taxable income, which is income after various deductions have been subtracted. Single Filing Status 10% on taxable income from $0 to $8,700, plus 15% on taxable income over $8,700 to $35,350, plus 25% on taxable income over $35,350 to $85,650, plus 28% on taxable income over $85,650 to $178,650, plus 33% on taxable income over $178,650 to $388,350, plus 35% on taxable income over $388,350 Married Filing Jointly or Qualifying Widow(er) Filing Status Married Filing JointlyQualifying Widow(er) Filing Status 10% on taxable income from $0 to $17,400, plus 15% on taxable income over $17,400 to $70,700, plus 25% on taxable income over $70,700 to $142,700, plus 28% on taxable income over $142,700 to $217,450, plus 33% on taxable income over $217,450 to $388,350, plus 35% on taxable income over $388,350.

8. Your employer collects taxes from each paycheck by deducting or withholding money from your wages.  Simply put withholding: employer deductions from employee’s earnings to pre-pay employee’s taxes.

9.  Kelly found a part-time job at a video store that pays $7.50 per hour. She wanted to take home at least $50.00 per week, so she agreed to work seven hours each Saturday. She expected her first paycheck to be $52.50. She was surprised to find it was only $40.39.  Why wasn’t Kelly’s paycheck what she expected?  Because of her payroll and income taxes

10.  What is Kelly’s gross income?  Yes, $52.50 (7 hours X $7.50 per hour)  Gross Income: the amount you earn before taxes are withheld.  What is Kelly’s net income?  Yes, $40.39  Net Income: the amount you receive after withholdings are subtracted from your gross income. (also referred to as take-home pay)

11. TThe amount of income tax you owe depends upon several factors: YYour gross income TThe number of people you support OOther expenses you pay WWhen you are hired your employer will ask you to complete federal Form W-4, which is required by law.

12.  An allowance is the number that reduces the amount of income withheld from your pay.  The more allowances you claim, the smaller the amount withheld will be & the higher your paycheck.  The fewer allowances you claim, the larger the amount withheld will be & the lower your paycheck.  VERY IMPORTANT TO UNDERSTAND: The number of allowances you claim will not change the amount of tax you owe. Your actual tax obligation is calculated on your tax return and then compared to your withholdings.

13. SSuppose you claim five allowances on your W-4 when you should only claim one. Will the amount withheld by employers be larger or smaller ? SSMALLER  Based upon you W-4 your employer might withhold $500 from your pay over the year, but you may owe $3,000 in taxes. What happens? YYou have to pay the rest of the taxes, $2,500 with your tax return.

14.  Is having more income than necessary withheld from your paycheck a good way to save?  From a financial standpoint NO. Why?  If you have more money withheld you are in essence letting the government use your money for free. You deposited the extra money from each paycheck you could be earning interest on it instead.