Taxes and Your Paycheck Chapter 5

Payroll Taxes Payroll Taxes are taxes based on the payroll of a business These taxes are paid to the government by you and your employer Payroll Taxes include income taxes and social security taxes.

Income Taxes Income Taxes are taxes you pay on most type of income you receive. Income taxes are not a fixed percentage of income that all Americans. The amount varies, depending on each taxpayer’s financial and family situation. Some taxes on income support social programs.

2011 Federal Tax Rate

Virginia Tax Rates IF YOUR VIRGINIA TAXABLE INCOME IS: Not over $3,000, your tax is 2% of your Virginia taxable income. but not your tax of excess over— over— I s— over— $ 3,000 $ 5,000 $ 60 + 3 % $ 3,000 $ 5,000 $ 17,000 $ 120 + 5 % $ 5,000 $ 17,000 $ 720 + 5.75 % $ 17,000 Example If your taxable income is $90,000, your tax is $720 + 5.75% of the amount over $17,000. This equals $720 + (.0575 x $73,000) = $720 + $4,197.50 = $4,917.50 which should be rounded to $4,918.

Federal Insurance Contribution Act FICA Federal Insurance Contribution Act The law that requires workers to contribute to social security and Medicare.

Withholding Your employer collects payroll taxes by deducting or withholding money from your wages. Withholding enables the government to collect taxes at a steady rate, rather than at the end of the year. Withholding also makes it more likely that people will pay their taxes.

Your pay stub Your pay stub is always attached to your pay check

Your pay Stub Gross income is the amount you earn before taxes are withheld. Net Income is the amount you receive after withholdings are subtracted from your gross pay.

Form W-4 When you are hired your employer will ask you to complete federal form W-4. Form W-4 provides the information your employer needs to determine the proper amount to withhold from your paycheck.

Your Responsibility for Proper Withholding If the amount withheld from your paycheck during the year is not close to the total tax you owe, the Internal Revenue Service may fine you. The Internal Revenue Service (IRS) is the federal agency that collects income taxes.

Allowances A worksheet provided with your W-4 tells you how to calculate the number of allowances you should claim. An allowance is a number that reduces the amount of money withheld from your paycheck. The larger the number of allowances you claim, the smaller the amount withheld.

Questions How do you and other taxpayers benefit from the taxes you pay? What are payroll taxes? What is the purpose of Form W-4? In what type of situations should you consider claiming extra allowances? What is your main goal in determining how many allowances to claim?

Your Income Tax Return A tax return is a set of forms that taxpayers use to calculate their tax obligation. Income Wages Tips Interest

Sources of Information for Your Tax Return Form W-2 This form is a summary of your earnings and withholdings for the year for a job.

Sources of Information for Your Tax Return Form 1099-INT This form is a statement of the interest your bank paid on your savings that year.

Income Tax Forms Form 1040EZ You must meet these criteria to use this form

Fill Out the 1040EZ Identify Yourself Income Unemployment Compensation Social Security Number Income Your income today is $64,250.00 Your Taxable Interest is $148.35 Unemployment Compensation This amount is $0.00 Adjusted Gross Income Amount of all above added together

Fill Out the 1040EZ Determine Your Dedications Your Taxable Income Yours is $9350 because you are single Your Taxable Income Adjusted Gross – Deductions Federal Income Tax Withheld $10,835 Did you get a refund?

Questions What information do you need to complete a Form 1040EZ, and where does it come from? What is the difference between adjusted gross income and taxable income? Why should you check your work before filing your tax return?

Taxes and Government Contributions to Social Security Under FICA regulations, workers’ wages are taxed at a rate of 6.20% This percentage is collected on gross income up to a maximum level that is adjusted each year. In 1999 the maximum income taxable for social security was 72,800.

Taxes and Government Cont. Contributions to Medicare An additional 1.45%is taken on all earned income to pay for the Medicare program. Your Employer’s Contribution Employers match employees’ payments for social security and Medicare. For each dollar you earn up to the maximum amount, 15.3 cents goes to the government for these taxes.

Sources of Federal Government Income

Taxes and Income There are 3 ways taxes are based on share of income they take as people’s income change Progressive Tax Takes a larger share of income as the amount of income grows. Someone who makes $25,000 would pay 15% while someone who made $350,000 would pay 39.6%

Taxes and Income Regressive taxes Proportional taxes These taxes take a smaller share of income as the amount of income grows. Sales Tax Joe 20,000 (pays 6% on 10,000 car) 3 percent of his income Sally 50,000 (pays 6% on 10,000 car) 1.2 percent of her income Proportional taxes Takes the same share of all peoples taxes No examples

How taxes are Collected Direct Taxes are paid directly to the government Indirect Taxes you pay that are included in the cost of a good Landlords put property taxes in there rent Pay-as-you-earn Federal withholdings

Types of Taxes Income Taxes Sales tax Property taxes Most states and some cities have income taxes patterned after the federal system Federal 15% to 39.6% States less than 10% Sales tax Taxes added on to the price of goods and services at the time of purchase Property taxes Taxes on the value of real estate property.

Types of Taxes Excise taxes Estate and Gift Taxes Taxes on sale of specific goods and services. Such as tobacco, gasoline, and alcoholic beverages, firearms, air travel Estate and Gift Taxes Taxes on property which will be received by those legally entitles to the estate. Gift taxes are taxes that may be paid by the giver of gifts worth more than 10,000

Types of Taxes Business and License Tax Customs Duties and Tariffs To operate certain kinds of business, companies, individuals have to have license, permit, or stamp These taxes are paid for these certifications Customs Duties and Tariffs To control the flow of products that are imported into this US. This sometimes results in items from abroad being sold at higher prices.

Questions What is the largest source of federal government revenue? Which governments benefit from sales taxes? What are the principals of taxation? What is the difference between sales and excise taxes?

Tax Cuts Lower taxes encourage consumers to make beneficial choices. New York eliminated sales taxes on certain products for short periods of time to encourage consumer spending to improve the economy Many local governments in areas with high unemployment reduce property taxes for businesses that operate there.

Charities If you contribute to a charity, the government may allow you to deduct your contribution from your adjusted gross income. This tax break influences many people to give more to charities.

U.S. Government Spending

What State and Local Governments Provide Buildings and maintaining local roads Operating police and fire protection Maintaining a criminal justice system Building and staffing public schools Building and operating state colleges and university

No Sales Tax States Sales taxes in the United States are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon. Hawaii has a similar tax although it is charged to businesses instead of consumers.

No Income Tax States Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

Best and Worst States for Taxes Even if you live in the most heavily taxed state, Maine (which collects an average of 13.5% of residents' income), you might not be ready to high-tail it to Alaska, the state with the lowest taxes (6.6%, and the only state that lacks both sales and income taxes), unless you have an affinity for mosquitoes and seemingly endless tundra.