Copyright 2007 Thomson South-Western Chapter 2 Income Sources & Taxes

Slide 2 Earned Income Types of Earned Income WagesWages from working at your job –Minimum wage –Overtime pay SalariesSalaries TipscommissionsTips 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 AdvantagesAdvantages –You can make decisions about how to work or run the business –You can keep profits from your work or the business DisadvantagesDisadvantages –Involves high risk –Often requires long work hours 2-1 Earned Income and Benefits

Slide 4 Employee Benefits from your job… 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 Success Skills Networking contacts relationshipsIs the process of making contacts and building relationships with people –Example of contacts include teachers, counselors, and coworkers –Keep track of contacts’ names, addresses, and phone numbers Helps you stay informed and share information with others 2-1 Earned Income and Benefits

Slide 6 Ethics Using Sick Leave Sick leave is a valuable benefit Employers have rules regarding use of sick leave Ethical behavior requires following the company’s sick leave rules 2-1 Earned Income and Benefits

Slide 7 Unearned Income received working in a jobIs money received from sources other than working in a job taxableIs taxable privategovernmentComes from private and government sources –Examples from private sources: dividends and interest you may receive for investing. Example: selling a stock, etc. 2-2 Unearned Income

Slide 8 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 9 Government Transfer Payments Money and benefits received from local, state, or federal governments In-kind transfer paymentsIn-kind transfer payments (non-money) –Examples: food stamps, rent subsidies, and Medicaid services In-cash transfer paymentsIn-cash transfer payments (money) –Examples: checks, debit cards, or other direct payments 2-2 Unearned Income

Slide 10 Taxes required paymentsAre required payments to a government collectedAre collected from many sources income –Examples: income taxes, use taxes, and excise taxes earned and unearnedAre paid on earned and unearned income 2-2 Unearned Income

Slide 11 Costs of Paying Taxes Costs of Paying Taxes …why some people don’t like it… reducesPaying taxes reduces disposable income (the actual money you have to spend) LessLess money is left to spend or save LowerLower spending may affect the economy 2-2 Unearned Income

Slide 12 Benefits of Paying Taxes taxpayersTaxes benefit taxpayers –Example: Social Security tax provides retirement benefits to workersSocial Security Taxes benefit all resident, such as: Taxes help provide parks for everyone to enjoy. highways fire, police & health depts. parks national defense national weather service regulation agencies that enforce standards & safety student loan programs relief from disasters—Hurricane Katrina, Ike, etc.

Slide 13 Building Communications Skills Critical Listening Involves evaluating the information you hear Unneeded or conflicting information is ignored Can be improved with practice Helps you make good decisions based on accurate and useful information 2-2 Unearned Income

Slide 14 Focus on... Social Security Benefits payWorkers pay into the Social Security fund and receive a statement each year matchedPayments are matched by employers receivesThe worker receives monthly benefit checks when retired 2-2 Unearned Income

Slide 15 So, to review... taxableWages, salaries, and business profits are taxable unearnedSome unearned income is taxable Lower higherLower taxes result in higher disposable income HigherlowerHigher taxes result in lower disposable income 2-3 Taxes and Other Deductions

Slide 16 Deductions Money that comes out of your paychecks. –Some are required… income tax, Social Security tax, and Medicare taxSocial Security taxMedicare tax –Some are by your choice… Union dues, retirement money, automatic deduction for savings, etc…retirement money 2-2 Unearned Income

Slide 17 Optional Deductions… –health insurance –vision insurance –savings plan –retirement plan 2-3 Taxes and Other Deductions Retirement plans allow many retired workers to live comfortably.

Slide 18 Social Security Tax federalIs 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 19 Medicare Tax Is withheld by the federal government retiredPays 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 20 How your Paycheck is figured… Gross taxes deductionsGross pay minus taxes and other deductions equals net pay Again, Remember: Your pay before deductions = Gross Pay. Your pay after deductions = Net Pay 2-3 Taxes and Other Deductions

Slide 21 Paycheck Pay Periods Weekly (means paid once a week) = 52 paychecks Bi-Weekly (means every 2 weeks) = 26 paychecks Semi-monthly (means twice a month) = 24 paychecks Monthly (means once a month) = 12 paychecks Types of Pay Hourly wage : You are paid a rate per hour. Example: $7.50 per hour Salary: You receive a fixed rate of pay each pay period. Not necessarily related to the number of hours worked. Commission : You earn a percentage of the amount of the sale you make Tips: You make money by providing service for customers, who then leave a tip. Piecework rate : You earn a set amount for each piece produced or for each piece produced that exceeds the expected level of production.

Slide 22 Look at the Sample Paycheck Stub 2-3 Taxes and Other Deductions

Slide 23 Income Taxes 2-3 Taxes and Other Deductions Internal Revenue Service It’s who collects your taxes each year for the government.

Slide 24 Income Taxes A certain amount of money is withheld according to how much you made and how many exemptions (or allowances) you claimed on the Form W Taxes and Other Deductions Total allowances

Slide 25 Tax Forms Taxes and Other Deductions Form W-4 A form completed by an employee to indicate his or her tax situation (exemptions, status, etc.) to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck. Form W-2 Used to report the taxable income a worker received during the calendar year Form 1040EZ Designed for use in filing income taxes by single and joint filers with no dependents or really no investments. Form 1040A A two-page form designed for use in filing income taxes. Allows more options for income and deductions to be entered Form 1040 A two-page form—even more detailed than the 1040A form. Form 1099-INT Shows the interest income earned during the year at one bank 3 3 types of Tax Forms

Slide 26 Form I-9, Employment Eligibility Verification

Slide 27 W-2 Form You receive by January 31. Tells what you actually earned for the year and what was taken out…

Slide EZ Form It’s EASY!!! Or, at least supposed to be.

Slide 29

Slide Form It’s 2-pages and It’s not so easy.

Slide 31 Tax forms also available at any Library or on-line

Slide 32 Technology Corner E-Filing…a way to file your taxes! Is a way to file a federal tax return electronically Provides income tax returns more quickly May have a fee with it—check it out! 1-2 Career Planning Source: United States Department of the Treasury, Internal Revenue Service, (accessed October 16, 2006). You can learn more about e-filing at the IRS Web site.

Slide 33 Employee Tip… Think about Workplace Safety Benefits both workers and the company Begins with good work attitudes Is part of everyone’s job Includes effective emergency plans 2-3 Taxes and Other Deductions

Slide 34 Workers’ Compensation insuranceAn insurance plan medicaldisabilityPays 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