Chapter 2 Net Income

CONGRATULATIONS!!! Congrats on your brand new job at BURGERWORLD!

Section 2.1 – Federal Income Tax When you start a new job, you must fill out IRS Form W4 and give it to your employer Helps your employer determine how much to withhold from your paycheck in taxes

What is Federal Income Tax? Federal Income Tax is money withheld by an employer from an employee’s paycheck to pay federal government taxes. These taxes are needed to keep the government agencies and services afloat. The Internal Revenue Service (IRS) provides employers with tables that show how much money to withhold.

The amount of money withheld depends on two things: FIT (continued) The amount of money withheld depends on two things: The amount of money you earn The information you give your employer on Form W-4

Form W-4 With each job, a new employee must fill out a Form W-4 Three types of info required: Whether to withhold at the single rate or at the lower married rate How many withholding allowances you claim Each allowance reduces the amount withheld Whether you want an additional amount withheld

Filling Out the W4 Can someone claim you as a dependent? A parent can claim you if… You are under age 19, or under 24 and a full time student You live with them for more than half the year They provide more than half of your financial support

Figuring out FIT withheld Tom Neiman’s gross pay for this week is $524.38. He is married and claims 2 allowances – himself and his wife. What amount will be withheld from his paycheck for FIT? Use the FIT table to find the appropriate income range. Find the column for 2 allowances $21

Federal Income Tax Rob Miller, single, works at Verizon. He earns $750 weekly. He claims 1 allowance. What is the FIT withheld?

Federal Income Tax Andrew Pope, single, claims 1 allowance. He has $46 withheld for FIT. Between what two dollar amounts does Mr. Pope earn a week?

Federal Income Tax Questions?!?!?!?!?!?!?!?!? Complete the Practice Worksheet

Section 2.2 – State Income Tax State Income Tax is a tax assessed to a citizen by a state taxing authority agency. Amount varies based on where you live Typically lower than FIT

Section 2.2 – State Income Tax Taxable wages is the sum of all earnings by an employee that are eligible for a particular type of tax Taxable wages depend on your federal standard deduction and your personal exemptions Personal Exemptions: The dollar amount that each individual taxpayer is able to deduct for him or herself or a dependent each year

Did You Know? All states have different state income tax rules 7 states that do not collect income tax AK, FL, NV, SD, TX, WA, WY 8 states have a flat income tax CO, IL, IN, MA, MI, NC, PA, UT

PA State Income Tax Pennsylvania has a state income tax rate of 3.07% with no personal exemptions

Flat Tax Rate - PA Married, earn $35,000 a year and live in PA. How much state income tax will be paid for the year? Taxable Wages = $35,000 Tax Paid = $35,000 ×0.0307 =1,074.50

Flat Tax Rate - NC Single, earn $64,000 a year and live in NC. NC has a $7,500 single exemption and has a flat rate of 5.75%. How much state income tax will be paid for the year? Tax. Wages =$64,000 −$7,500=56,500 Tax Paid =$56,500 ×0.0575=$3,248.75

Flat Tax Rate – Ill Single, earn $50,000 a year and live in Illinois (which has a $2,125 personal exemption for single and a flat rate of 3.75%). How much state income tax will be paid for the year? Tax. Wages =$50,000 −$2,125=$47,875 Tax Paid =$47,875 ×0.0375 =$1,795.31

2.3 – Graduated State Income Tax Graduated Income Tax is an income tax in which the tax rate increases at different levels of income. Your tax rate INCREASES as your income INCREASES

Graduated State Tax - Example Annual salary is $32,000, single. How much state income tax is paid for the year? Personal Exemptions Single $1,500 Married $3,000 Each Dependent $750 State Tax Annual Gross Pay Tax Rate First $3,500 3.0% Next $3,500 4.5% Over $7,000 7.0%

Graduated State Tax - Example 2 Annual salary is $54,200, married. How much state income tax is paid for the year? Personal Exemptions Single $1,500 Married $3,000 Each Dependent $750 State Tax Annual Gross Pay Tax Rate First $3,500 3.0% Next $3,500 4.5% Over $7,000 7.0%

Graduated State Tax - Example 2 Annual salary is $78,000, married, 2 dependents. How much state income tax is paid for the year? Personal Exemptions Single $1,500 Married $3,000 Each Dependent $750 State Tax Annual Gross Pay Tax Rate First $3,500 3.0% Next $3,500 4.5% Over $7,000 7.0%

2.4-Social Security and Medicare Taxes Social Security is a federal government program to pay for retirement and disability benefits(ages 62 and over) Medicare is a federal government program to provide medical insurance (ages 65 and over) Both are financed by taxes

Social Security and Medicare Taxes Social security deducts 6.2% on your first $118,500 of annual income Medicare deducts 1.45% on ALL of your earnings Earnings To Date just means how much money you have made from January 1st to the current date Tax Withheld = (Gross Pay) x (Tax Rate)

Example 1 Greg Leonard’s gross bi-weekly pay is $648.00. His earnings to date for the year total $15,228. What amount is deducted from his paycheck for Social Security taxes? Medicare taxes? What is the total deduction? SST: $648.00 x 6.2% = $40.18 MT: $648.00 x 1.45% = $9.40 Total deductions: $40.18 + $9.40 = $49.58

Income > $118,500 When a persons year to date earnings exceed $118,500, they no longer have to pay social security tax for the remainder of the calendar year. Refer to example worksheet on how to solve problems involving this situation (provided)

Example You have an annual salary of $132,000 (this is equal to a monthly salary of $11,000). A portion of Novembers income would not be subject to SST since the year-to-date earnings for November would exceed $118,500. $121,000 - $118,500 = $2,500. So $2,500 of Novembers income is NOT subject to SST. Thus, $11,000 - $2,500 = $8,500 is subject to SST.

Example 2 Jim Sorgi is the president of a bank. He earns a yearly salary of $177,000, and is paid monthly. How much is withheld in September for Social Security and Medicare? What is the total? $14,750 per pay period The year-to-date earnings for September would be $14,750(9) = $132,750 So $132,750 - $118,500 = $14,250 is NOT taxable So, $14,750 - $14,250 = $500 is taxable $500(.062) = $31 for Social Security for September

What is the cost of… $200 $125 $5,000 $220 Trip to the emergency room X-rays Surgery Medication and Supplies $200 $125 $5,000 $220

2.5 – Group Health Insurance Group Insurance is insurance offered by many businesses to employees, paid in part by the business and in part by deductions from employees’ paychecks Group insurance can cost less than individual insurance

Group Health Insurance Employee’s Share = Annual Amount x Employee’s Percent The employee’s amount is usually deducted each pay period Deduction per pay period = Total Annual Amount Paid by Employee # of Pay Periods Per Year

Example 1 Jonny Tsunami has family medical coverage through the group medical plan that his work company provides for its employees. The annual cost of Tsunami’s family membership is $4,500. The company pays 80% of the cost. How much does he pay annually for medical insurance? Step 1: Find the percent paid by the employee 100% - (Percent company pays) 100% - 80% = 20% Step 2: Find the total amount paid by employee Annual Amount x Employee’s Percent $4,500 x 20% = $900.00 total paid by employee

Example 2 Tim Clark, carpenter. He has family medical coverage. The annual cost of the insurance is $5,000. The company pays 75% of the cost. How much is deducted from his bi-weekly paycheck for medical insurance? Percent paid by employee: 100% - 75% = 25% Amount paid by employee: $5,000(0.25) = $1,250 Deduction per pay period: $1,250 ÷ 26 = $48.08

Statement of Earnings (2.6) Additional deductions can be taken from your pay Union dues, community funds, savings plans, etc. Your Earnings Statement (attached to paycheck) lists all your deductions, gross pay, and net pay for the pay period Net Pay is the amount you have left after all tax withholdings and personal deductions have been subtracted

Statement of Earnings Net Pay = Gross Pay – Total Deductions

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Additional PA Taxes State Unemployment Insurance (SUI) Local Taxes 0.07% of your pay Local Taxes Earned Income Tax (the higher of where you work and live) – Midland is 1% of your pay Local Service Tax (tax paid for where you work) Flat tax. Usually about $1 a week.

Where Did the Money Go? Federal Income Tax (about 15%) State Income Tax (3.07%) Social Security Tax (6.2%) Medicare Tax (1.45%) Local Earned Income Tax (1%) Local Service Tax (about 0.11%) State Unemployment Insurance (0.07%) Group Insurance Rates Retirement

Example 1 Find total deductions, then find net pay 15 Katie Kramer Dept Employee Check Number Gross Pay Net Pay 15 Katie Kramer 1501 $600.00 Tax Deductions Other Deductions FIT SST Medicare State Local Medical Union Dues Others - 12.40 2.50 Weekly salary. Married, claims 3 allowances. State tax is 1.5% of gross pay, no deductions or exemptions. She pays $12.40 for medical insurance, $2.50 for charity. Find Net Pay.

Example 2 2 Jonny Patton 14 $450.00 Tax Deductions Other Deductions Dept Employee Check Number Gross Pay Net Pay 2 Jonny Patton 14 $450.00 Tax Deductions Other Deductions FIT SST Medicare State Local Medical Union Dues Others - 10.40 2.50 Single, 2 allowances. State tax is 2.5%, no deductions or exemptions. He pays $10.40 for medical insurance and $2.50 for charity. Is this statement correct?

Example 3 Serena Masters is single and claims 1 allowance. Her gross weekly pay is $440.00. Each week she pays federal, Social Security, and Medicare taxes, $14.40 for medical insurance, and $10.00 for union dues. Find her net pay. Federal: $40 Social Security: $440(0.062) = $27.28 Medicare: $440(0.0145) = $6.38 Net Pay = $440 – ($40.00 +$27.28 + $6.38 + $14.40 + $10.00) =

Concept Check Pg. 129, #1-7