Understanding Pay and Benefits Federal Income Tax PAY, BENEFITS, AND FEDERAL INCOME TAX

Week 4 - Pay, Benefit, & Fed Income Tax Understanding Pay and Benefits GOALS Compute payroll deductions and net pay. Identify optional and required employee benefits. SLIDE 2

Week 4 - Pay, Benefit, & Fed Income Tax Gross Pay, Deductions, and Net Pay Gross pay is the total amount you earn before any deductions are subtracted. Amounts subtracted from your gross pay are called deductions. When all deductions are taken out of your gross pay, the amount left is your net pay. Gross Pay – Deductions = Net Pay SLIDE 3

Week 4 - Pay, Benefit, & Fed Income Tax Gross Pay Calculation 1. Regular Pay = Regular Hours x Regular Rate 2. Overtime Rate = Regular Rate x Overtime Pay = Overtime Hours x Overtime Rate 4. Gross Pay = Regular Pay + Overtime Pay Regular Pay + Overtime Pay = Gross Pay SLIDE 4

Example of Gross Pay Calculations for Hourly Employee Type of PayHoursRateAmount Regular pay40×$8.00 per hour=$ Overtime pay4×$12.00 per hour=48.00 Gross pay$ Week 4 - Pay, Benefit, & Fed Income Tax SLIDE 5

Week 4 - Pay, Benefit, & Fed Income Tax Salary Salary may be stated as an annual amount. The annual amount is divided into equal amounts to be paid each pay period. Common pay periods Monthly Twice a month Every two weeks Weekly SLIDE 6

Example of Gross Pay Calculations for Salaried Employee Annual Salary ÷ Pay Period per Year = Gross Pay per Paycheck Monthly$24,000÷12=$2,000 Twice a month$24,000÷24=$1,000 Every two weeks$24,000÷26=$ Weekly$24,000÷52=$ Week 4 - Pay, Benefit, & Fed Income Tax SLIDE 7

Week 4 - Pay, Benefit, & Fed Income Tax Deductions Amounts subtracted from your gross pay are called deductions. Some deductions, such as Social Security tax and Federal Income tax, are required by law. Other deductions are optional. SLIDE 8

Week 4 - Pay, Benefit, & Fed Income Tax Net Pay When all deductions are taken out of your gross pay, the amount left is your net pay. Amount of your paycheck “Take-home pay” Amount you can actually spend as you wish SLIDE 9

Week 4 - Pay, Benefit, & Fed Income Tax Benefits and Incentives Profit sharing Paid vacations and holidays Employee services Child care Sick pay Leaves of absence Insurance Bonuses and stock options Pension and savings plans Travel expenses SLIDE 10

Week 4 - Pay, Benefit, & Fed Income Tax Profit Sharing Profit sharing is a plan that allows employees to receive a portion of the company’s profits at the end of the corporate year. The more profits the company makes, the more the company has to share with employees. Profit sharing is considered incentive pay— money offered to encourage employees to strive for higher levels of performance. SLIDE 11

Week 4 - Pay, Benefit, & Fed Income Tax Paid Vacation Most businesses provide full-time employees with a set amount of paid vacation time. While you are on vacation, you are paid as usual. The amount of vacation time often varies with years of service. SLIDE 12

Week 4 - Pay, Benefit, & Fed Income Tax Paid Holidays Paid holidays typically include: Christmas, Thanksgiving, Fourth of July, Labor Day, and Memorial Day. Other holidays that many companies consider paid holidays are New Year’s Day, Veterans Day, Martin Luther King Day, and Presidents Day. An employee required to work on a holiday is usually paid double or more than double the regular hourly rate of pay. SLIDE 13

Week 4 - Pay, Benefit, & Fed Income Tax Employee Services Employee services are the extras that companies offer in order to improve employee morale and working conditions. Examples include: Employee discounts Social and recreational programs Free parking Tuition reimbursement for college courses Wellness programs Counseling for employee problems SLIDE 14

Week 4 - Pay, Benefit, & Fed Income Tax Child Care Onsite child-care facilities Coverage of child-care expenses as a part of employee benefit packages SLIDE 15

Week 4 - Pay, Benefit, & Fed Income Tax Sick Pay Many businesses also provide an allowance of days each year for illness, with pay as usual. It is customary to receive three to ten days a year as “sick days” without deductions from pay. SLIDE 16

Week 4 - Pay, Benefit, & Fed Income Tax Leaves of Absence Some employers allow employees to temporarily leave their jobs (without pay) and return to their jobs at a later time. There are often restrictions on the reason for a leave, such as having children or completing education. Disadvantage: Unpaid Advantage: Job security SLIDE 17

Week 4 - Pay, Benefit, & Fed Income Tax Personal Days Some employers allow personal days (absences for personal reasons) so that employees can attend to important matters without calling in “sick” when they aren’t sick. SLIDE 18

Week 4 - Pay, Benefit, & Fed Income Tax Insurance Most large companies provide group insurance plans for all employees. A few plans are paid for almost entirely by the employer, as a part of employee compensation. Most plans require that employees pay for part of their own coverage, as well as to cover dependents. Common types of insurance plans Group health insurance Group life insurance Group dental insurance Group vision insurance SLIDE 19

Week 4 - Pay, Benefit, & Fed Income Tax Bonuses and Stock Options Bonuses are incentive pay based on quality of work done, years of service, or company sales or profits. Stock options give employees the right to buy a set number of shares of the company’s stock at a fixed price. SLIDE 20

Week 4 - Pay, Benefit, & Fed Income Tax Pension and Savings Plans Pension plans are funded by the employer. Retired employees receive a monthly check. Employees become vested (entitled to the full retirement account) after a specified period of time, such as five years. SLIDE 21

Week 4 - Pay, Benefit, & Fed Income Tax Employer-Sponsored Retirement Savings Plans Common plans 401(k) for private employers 403(b) for government employers Employees put money in these accounts. The employer may also (but is not required to) contribute money to the employee’s account. SLIDE 22

Week 4 - Pay, Benefit, & Fed Income Tax Travel Expenses Company car Mileage allowance Daily allowance to cover hotel, meals, and other travel expenses Expense reports and receipts SLIDE 23

Week 4 - Pay, Benefit, & Fed Income Tax Evaluating Employee Benefits Benefits generally are not taxable to employees (except bonuses and other benefits paid in cash), yet they provide valuable coverage and advantages. Generally, large companies provide more extensive optional benefits than do small companies. In recent years, employee benefits have been expanded to meet the needs of different life situations. SLIDE 24

Our Tax System Filing Tax Returns FEDERAL INCOME TAX

Week 4 - Pay, Benefit, & Fed Income Tax Our Tax System GOALS Explain the purpose of taxes and describe the different types of taxes. Describe the U.S. tax system and explain how it works. SLIDE 26

Week 4 - Pay, Benefit, & Fed Income Tax Purpose of Taxes In a free enterprise system such as ours, the government collects money from citizens and businesses in the form of taxes. These incoming funds to the government are called revenue. The government spends the revenues received according to priorities set by Congress. SLIDE 27

Week 4 - Pay, Benefit, & Fed Income Tax Progressive Taxes Progressive taxes take a larger share of income as the amount of income grows. Federal income taxes are progressive. SLIDE 28

Week 4 - Pay, Benefit, & Fed Income Tax Components of the Tax System The IRS The power to tax Paying your fair share Tax rates apply to income ranges, or tax brackets. Our income tax system is based on voluntary compliance, which means that all citizens are expected to prepare and file tax returns of their own accord without force. SLIDE 29

Week 4 - Pay, Benefit, & Fed Income Tax Components of the Tax System Failure to pay taxes Failure to do so can result in a penalty: interest charges on the taxes owed plus a possible fine. Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both. (continued) SLIDE 30

Week 4 - Pay, Benefit, & Fed Income Tax An IRS Audit Every year, the IRS calls millions of taxpayers for an audit, which is an examination of their tax returns. Types of audits Office audit Correspondence audit Field audit SLIDE 31

Week 4 - Pay, Benefit, & Fed Income Tax Filing Tax Returns GOALS Define basic tax terminology. Prepare tax forms 1040EZ and 1040A. SLIDE 32

Week 4 - Pay, Benefit, & Fed Income Tax Filing Status Filing status describes your tax-filing group. You must mark one of the following as your filing status on your tax form: Single person (not married) Married person filing a joint return Married person filing a separate return “Head of household” Qualifying widow(er) SLIDE 33

Week 4 - Pay, Benefit, & Fed Income Tax Exemptions An exemption is an amount you may subtract from your income for each person who depends on your income to live. Each exemption reduces your taxable income and thus your total tax. SLIDE 34

Week 4 - Pay, Benefit, & Fed Income Tax Exemptions—Who Qualifies Yourself, unless someone else claims you on their return Your spouse, if you are filing jointly Your dependents A dependent is a person who lives with you and for whom you pay more than half his or her living expenses. SLIDE 35

Week 4 - Pay, Benefit, & Fed Income Tax Gross Income Gross income is all the taxable income you receive. Earned income refers to money you earned from working. Unearned income refers to money you received from passive activity (other than working). SLIDE 36

Week 4 - Pay, Benefit, & Fed Income Tax Common Types of Income Wages, salaries, and tips Interest income Dividend income Unemployment compensation Social security benefits Child support Alimony SLIDE 37

Week 4 - Pay, Benefit, & Fed Income Tax Adjusted Gross Income The law allows you to subtract some types of spending from gross income. You can “adjust” your income by subtracting such things as contributions to individual retirement accounts, student loan interest, and tuition and fees. These adjustments are subtracted from gross income to determine adjusted gross income. Adjustments reduce income that is subject to tax. Note that these adjustments are not available on Form 1040EZ. SLIDE 38

Week 4 - Pay, Benefit, & Fed Income Tax Adjusted Gross Income Gross income –Adjustments Adjusted gross income SLIDE 39

Week 4 - Pay, Benefit, & Fed Income Tax Taxable Income Taxable income is the income on which you will pay tax. SLIDE 40

Week 4 - Pay, Benefit, & Fed Income Tax Taxable Income Gross income –Adjustments Adjusted gross income –Deductions –Exemptions Taxable income (continued) SLIDE 41

Week 4 - Pay, Benefit, & Fed Income Tax Deductions Itemize deductions Standard deduction SLIDE 42

Week 4 - Pay, Benefit, & Fed Income Tax Itemize Deductions Itemize deductions are expenses you can subtract from adjusted gross income to determine your taxable income. Examples include: Medical and dental expenses beyond a specified percentage of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Moving expenses SLIDE 43

Week 4 - Pay, Benefit, & Fed Income Tax Standard Deduction If you do not have many deductions, your tax may be less if you take the standard deduction. The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions. This amount changes each year. SLIDE 44

Week 4 - Pay, Benefit, & Fed Income Tax Tax Credits A tax credit is an amount subtracted directly from the tax owed. It is different from a deduction.  A deduction is subtracted from adjusted gross income.  It reduces your tax by reducing the amount of income on which the tax is figured. A tax credit reduces the tax itself. The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time. SLIDE 45

Week 4 - Pay, Benefit, & Fed Income Tax Preparing Your Income Tax Return Who must file? When to file? Which form to use? Where to begin? Filing electronically Tax preparation software SLIDE 46

Week 4 - Pay, Benefit, & Fed Income Tax Form 1040EZ Step 1: Name, address, and Social Security number Step 2: Report income Step 3: Compute tax Step 4: Refund or amount owed Step 5: Sign the return SLIDE 47

Week 4 - Pay, Benefit, & Fed Income Tax Form 1040A Step 1: Name and address Step 2: Filing status Step 3: Exemptions Step 4: Income Step 5: Adjusted gross income Step 6: Taxable income Step 7: Tax, credits, and payments Step 8: Refund or amount owed Step 9: Signature SLIDE 48