Income Tax Applied Business Practice

Fact or Myth?  A good way to save is to have more money than necessary withheld from your paychecks, so you will receive a big tax refund at the end of the year.  The tax system is too complicated for ordinary taxpayers to understand

Kelly found a part-time job after school that pays $7.50 per hour. E wants to take home at least $50 per week, so she agreed to work seven hours each Saturday. She expected her first paycheck to be $ She was surprised to find it was only $ Why wasn’t Kelly’s check larger?

Taxes and Your Paycheck  FICA Federal Insurance Contributions Act Social Security and Medicare  Gross Income Amount you earn before taxes are withheld  Net Income Amount you receive after withholdings are deducted from your gross pay.

Taxes and Your Paycheck  Withholding Deducting money from your wages to collect payroll taxes  How does withholding benefit you? It spreads tax payment over time, to avoid one huge payment

PAYCHECK STUB ABC Company 144 E. Central Ave. Hometown, ST Check No Employee Name: Jane Smith Employee Address: 986 Park St. Hometown, ST Employee Social Security Number: Check Date: 07/22/05Pay Period Ending:07/22/05 EarningsDeductions Hours: 20Federal Income Tax$18.75 Rate:$ 6.25Social Security Tax$ 7.75 Medicare Tax$ 1.81 Gross Pay$125.00State Tax$.50 Total Withholding$28.81 Gross Pay$ Total Deductions$ Net Pay$ 96.19

Warm-Up  Should you reduce your allowances (on your W-4) to force yourself to save? Why or why not?

Warm-up 1.How do you and other taxpayers benefit from the taxes you pay? 2.What is the purpose of Form W-4? 3.What is an allowance on form W-4? 4.What is your main goal in determining how many allowances to claim?

Taxes and Your Paycheck  Form W-4 Provides the information of the amount to withhold from your paycheck. Completed by the Employee  IRS Internal Revenue Service  Federal agency that collects income taxes

Taxes and Your Paycheck  Allowances Number that reduces the amount of money withheld from your pay Larger number of allowances, smaller amount withheld

A Bit of History  What amendment established the current income tax system? 16  When was this amendment ratified? Feb 3, 1913  Why was it necessary to make this part of the constitution?

Taxes and Your Paycheck  Withholding too much Students who work part-time during school, but full time during summer may have more withheld Results in a refund  Withholding too little Results in a tax bill May need to lower your allowances

Taxes and Your Paycheck  Overwithholding as a way to save Force a savings plan Claiming too few allowanced guarantees a refund  Is this a good savings plan? It is not a good savings plan because the government does not pay interest

Warm-Up  How do you think taxes influence consumer’s decisions?

File a Tax Return  Tax Return Set of forms used by taxpayers to calculate tax obligation  Minimum Income to file a return If you worked and had Federal income taxes taken out – file If you are self employed and earned $400 - file  Filing must be in by April 15 th every year!

File a Tax Return  Income Wages Tips Earned Interest Cash earned for jobs

File a Tax Return  Form W-2 Summary of your earnings and withholdings for the year for a job Must send in a copy with your W-2 Employer sends a copy to IRS

a Control Number 2233 void For office use only ► OMB No b Employer Identification number 1. Wages, Tips, other 2. Federal Income Tax Withheld compensation , c Employers name, address and zip code 3. Social security 4. Social Security Tax Withheld wages and tips ABC Company 5, E. Central Ave. Hometown, ST Medicare wages 6. Medicare Tax Withheld and tips 5, d Employee’s Social Security Number 7. Social Security Tips 8. Allocated Tips Advanced EIC payment 10. Dependent Care Benefits e Employees Name (first, middle initial, last) 11 Non-Qualified Plans 12. Benefits included in box 1 Jane Smith 986 Park St.13. See instrs. for box Other Hometown, ST statutory deceased pension legal deferred employee plan rep. compensation F Employee’ address and ZIP code 16 State Employer’s State ID no. 17 State Wages, tips, etc 18 State income tax ST

File a Tax Return  Form 1099-INT Statement of interest your bank paid on your savings that year Banks send this information to the IRS

Income Tax Forms  1040 EZ Simplest of the tax forms  To Qualify to use the EZ form: No dependents You and spouse under age 65 No blindness Income less than $50,000 Earned no more than $400 in interest No income other than wages, interest, tips, scholarships, or unemployment compensation

Filling Out the 1040 EZ  Identifying yourself Social Security Number  Unique number used to identify you throughout your entire life

Income Tax Forms  Form 1040 More complex form Deductions  Expenses you can legally subtract from your income when figuring your taxes. Own a home Children Run a small business Stocks  Dependent Someone you financially support

File a Return  Refund When your withholding is more than the taxes owed (Government pays you the overage amount paid)  Amount You Owe When your withholding is less than the taxes owed (you pay the remaining amount due)

Taxes and Government  Sources of Federal Government Income Personal Income Tax Social Security, Medicare, Unemployment, & Other Retirement Tax Borrowing Corporate Income Tax Excise, Custom, Estate, Gift, & Misc. Tax

Sources of Fed. Gov’t. Income Social Sec., Medicare, Unemployment, other retirement tax Personal Income Tax Corporate Income Tax Excise, Estate, Gift, misc. tax Borrowing 33% 42% 11% 7%

Taxes and The Government  Where does the government get its money? 42% Personal Income Taxes 33% Social Security Taxes, Medicare, and unemployment taxes  Who contributes to pay Medicare and Social Security? Employees (pays a max of 7.65%) Employers (pays a max of 7.65%)

Warm-Up  Why should you check your work before filing your tax return?

Principles of Taxation  Benefit Principle Those who use a good or service provided by the government should pay for it  Example: toll roads  Ability to Pay Principle Those who have larger incomes should pay a larger share of what they receive  As your income increases your rate of tax increases from 15 – 39.9%

How Taxes Are Collected  Direct Taxes Paid directly to the government Examples: income, property  Indirect Taxes Taxes you pay that are included in the cost of a good/service Examples: Hair care services

How Taxes Are Collected  Pay-As-You-Earn Tax Taxes paid as you earn income Example: withholdings on your paycheck

Types of Taxes  Sales Tax Taxes added to the price of goods and services  Property Tax Taxes on the value of real estate property

Types of Taxes  Excise Tax Collected on sale of specific goods or services  Tobacco  Gas  Alcohol  Oil  Firearms  Air travel

Types of Taxes  Estate Taxes Taxes on property received when someone dies  Gift Tax Paid for by the giver of gifts that exceed 12,000 (for 2006)

Types of Taxes  Business (License) Tax Tax paid for certification May be accompanied by a test

Warm-up  Gross Pay = $800 Federal Tax = 14% State Tax = 4.5% Social Sec. = 6.2% Medicare = 1.6%  What is the total Withholdings?  What is the Net Pay?

Government Spending  Sin Taxes Taxes on items that can be harmful to your health  Tobacco  Alcohol

Warm-Up  Gross Pay = $685 Federal tax = 14% State tax = 2% Social Security = 6.2% Medicare = 1.5%  What is the total (dollar amount) withholdings?  What is net pay?

How you can reduce tax obligation  # 1 way to lower taxes Give to charities

Government Spending  Federal Government Spends on: Social Security, Medicare, other retirement National Defense, veterans, foreign affairs Social Programs Interest on Debt Community Development

Government Spending  State and Local government spends on: Buildings and roads Police, Fire protection services Criminal Justice system Schools Colleges, University Sewage treatment plants Unemployment compensation plans