2. 3
Income and Taxes

3. 3.1
Income

4. Objectives List and describe examples of earned income
Identify common payroll deductions, and explain how net pay is determined
Describe common types of employee benefits
Explain work-life balance

5. Key Terms earned income wage overtime wage piecework salary commission
tip
bonus
gross pay
payroll deduction
Form W-4
dependent
net pay
FICA taxes
employee benefit
compensation
work-life balance

6. Essential Question
Why is it important for a worker to understand how net income is calculated?

7. Earned Income
Earned income is the income received from employment, including self-employment
wages
salaries
commissions
tips
bonuses
self-employment income

8. Earned Income (Continued)
A wage is payment for work that is usually calculated on an hourly, daily, or piecework basis
Example: an hourly wage, which is a fixed amount paid for each hour worked
Paid on a schedule, such as every week or every two weeks

9. Earned Income (Continued)
Minimum wage is the lowest hourly wage employers can pay most workers by law
The US government sets and enforces the minimum wage through the Fair Labor Standards Act (FLSA)

10. Earned Income (Continued)
Overtime wage is the amount paid for working time in a week that is beyond the standard 40-hour workweek
Eligible workers who work more than 40 hours per week must receive overtime pay at least 1.5 times their regular hourly rate for the hours in excess of 40

11. Earned Income (Continued)
regular earnings: 40 hours  $10 per hr = $400 overtime rate: $10 per hr  1.5 = $15 per hr overtime earnings: 4 hours  $15 per hr = $60 total earnings: $400 + $60 = $460

12. Earned Income (Continued)
Piecework is a wage based on a rate per unit of work completed
Example: garment workers paid by the number of garments completed
Total piecework wages must add up to at least the minimum wage

13. Earned Income (Continued)
Salary is a fixed payment for work and is expressed as an annual figure
Paid in periodic equal payments at regular intervals during the year
Examples are weekly, biweekly, semimonthly, monthly
Salaried workers are expected to put in as much time as it takes to do the job

14. Earned Income (Continued)

15. Earned Income (Continued)
A commission is income paid as a percentage of sales made by a salesperson
Some people work on a commission-only basis
Others may receive a combination of a base salary plus commission
Income can vary from month to month or year to year

16. Earned Income (Continued)
A tip is money paid for service beyond what is required
Also called a gratuity
This money belongs to workers, not their employers
Common for food servers, taxi drivers, hair stylists, and other service-industry workers
FLSA requires that tipped workers be paid at least the minimum wage

17. Earned Income (Continued)
A bonus is money added to an employee’s base pay
Incentives to encourage workers to perform better
Usually based on worker performance, length of time with the company, or company performance

18. Earned Income (Continued)
Self-employed people work for themselves and earn income called profit or self-employment income
Self-employed workers include artists, carpenters, consultants, and others
Self-employed workers must arrange and pay for their own employment-related benefits

19. Payroll Deductions Gross pay is total income before payroll deductions
A payroll deduction is a subtraction from gross pay
Some deductions are mandatory
Social Security taxes
Medicare taxes
income taxes

20. Payroll Deductions (Continued)
The federal income tax system is built on a pay-as-you-earn concept
Each working person pays taxes from each paycheck instead of in one lump sum each year
State and local income taxes usually work this way, too

21. Payroll Deductions (Continued)
Form W-4 is the Employee’s Withholding Allowance Certificate that helps an employer determine how much income tax to withhold from an employee’s paychecks as payroll deductions
When you begin a job, your employer will ask you to complete a Form W-4

22. Payroll Deductions (Continued)
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23. Payroll Deductions (Continued)
The amount of income tax withheld from your paycheck depends on multiple factors
how much is earned
marital status
number of allowances claimed

24. Payroll Deductions (Continued)
An allowance is an amount of earnings not subject to income taxes
Taxpayers may take an allowance for themselves and for each dependent
A dependent is an individual who relies on someone else for financial support, such as a child, a spouse, or an elderly parent
The more allowances that are claimed, the smaller the amount of tax that is withheld

25. Payroll Deductions (Continued)
Net pay, or take-home pay, is gross pay (plus bonuses) minus payroll deductions
Based on the information provided on the Form W-4, deductions are made from gross pay

26. Payroll Deductions (Continued)
Most workers in the United States are covered by the Federal Insurance Contributions Act (FICA)
FICA taxes, or Social Security and Medicare taxes, are taxes paid by the employee and employer that are used to finance the federal Social Security and Medicare programs

27. Payroll Deductions (Continued)
FICA is a matching tax
Employers must match the amount of FICA tax that the employees pay; each pays 7.65%
6.2% for Social Security with an annual cap on income that is subject to Social Security taxes
1.45% for Medicare with no cap on income taxed for Medicare

28. Payroll Deductions (Continued)
Federal, state, and local withholding taxes are deducted from gross pay based on earnings, marital status, and the number of withholding allowances claimed
Other voluntary deductions may be withheld for health, dental, vision, and other insurance that employees get through their employers

29. Benefits
An employee benefit, or fringe benefit, is a form of noncash compensation received in addition to a wage or salary
Compensation is wages or salaries and benefits paid to employees

30. Benefits (Continued) Common benefits include: insurance
retirement plan
sick leave and vacation time
flexible work schedule
childcare
profit-sharing program
opportunities for continuing education and professional development

31. Work-Life Balance
Work-life balance is the amount of time an individual spends at work compared to the amount of time spent in a personal life
personal leave
family leave
flextime
job sharing
telecommuting

32. Section 3.1 Review
Name the US government law that sets and enforces the minimum wage.
The Fair Labor Standards Act (FLSA) sets and enforces the minimum wage.
What is income called when you earn it working for yourself rather than for a company?
Income earned while working for yourself is known as self-employment income.

33. Section 3.1 Review (Continued)
Explain why the federal income tax system is known as a pay-as-you-earn system.
The federal income tax system is known as a pay-as-you-earn system because a working person pays taxes from each paycheck instead of in one lump sum each year.

34. Section 3.1 Review (Continued)
What is an employee benefit?
An employee benefit is a form of noncash compensation received in addition to a wage or salary.
Name one of the ways an organization can offer work-life balance to its employees.
Personal leave, family leave, flextime, job sharing, telecommuting.

35. 3.2
Tax Returns

36. Objectives
List examples of information needed to file an income tax return
Explain how to prepare a Form 1040EZ
Identify sources of tax information and assistance
Describe the tax audit process

37. Key Terms tax return voluntary compliance Form W-2 gross income
unearned income
taxable income
adjusted gross income
tax deduction
itemized deduction
standard deduction
exemption
tax liability
tax credit
tax table
audit
tax audit

38. Essential Question
What information is required for an individual to complete a tax return?

39. Income Tax Return Basics
The Internal Revenue Service (IRS) is the government agency responsible for enforcing federal income tax laws
A tax return is a report containing information used to calculate taxes owed by the taxpayer
Tax returns may also be filed with state governments, and with some cities
Not filing a tax return is a crime

40. Income Tax Return Basics (Continued)
Individual income tax is the federal government’s largest source of revenue
Voluntary compliance means that the government expects individuals and businesses to voluntarily report all income that is subject to the income tax

41. Income Tax Return Basics (Continued)
Some income is reported by employers
Other sources of income must be voluntarily reported by the taxpayer
tips
gains from selling personal property
income earned by independent consultants

42. Income Tax Return Basics (Continued)
Individuals must file a tax return when their income reaches a level set by the IRS
If income is not great enough to require a tax return but income taxes were withheld, a return must be filed to get a refund
Refunds are never automatic

43. Income Tax Return Basics (Continued)
Tax returns must be filed no later than April 15 of the year after the income was earned
If April 15 falls on a Saturday, a Sunday, or a national holiday, the filing date is extended to the next business day
Late filers are charged a penalty

44. Income Tax Return Basics (Continued)
Filing status is a category that determines which tax form to use and the tax liability
It is based on your marital status on the last day of the tax year
Single
Married filing jointly (even if only one had income)
Married filing separately
Head of household (with qualifying person)
Qualifying widow(er) with dependent child

45. Income Tax Return Basics (Continued)
Form W-2 is a Wage and Tax Statement that shows your earnings and the amounts of income, Social Security, and Medicare taxes withheld from your earned income during the year
You will receive a Form 1099-MISC for income from contracted work, royalties, unemployment compensation, and other nonemployee income

46. Income Tax Return Basics (Continued)
Gross income is all the income an individual receives in a year, including both earned and unearned income
A taxpayer must calculate the gross income for a tax return
Unearned income is earnings from sources other than work

47. Income Tax Return Basics (Continued)
Unearned income includes:
lottery winnings
interest
rent income
dividends and capital gains
Social Security/retirement income
alimony
unemployment compensation

48. Income Tax Return Basics (Continued)
Taxable income is the amount on which taxes are calculated
Tax adjustments are government-approved reductions in gross income which help reduce the amount of tax that must be paid
Adjusted gross income is calculated by subtracting adjustments from total income

49. Income Tax Return Basics (Continued)
A tax deduction is an amount that is subtracted from adjusted gross income
An itemized deduction is an allowed expense that can be deducted from adjusted gross income
mortgage interest
property taxes
state income taxes
charitable contributions

50. Income Tax Return Basics (Continued)
Taxpayers who do not have enough itemized deductions can choose the standard deduction instead
The standard deduction is a fixed amount that may be deducted from adjusted gross income
Amount is set by law
Amount varies according to filing status

51. Income Tax Return Basics (Continued)
An exemption is an amount that a taxpayer can claim for each person who is dependent on that person’s income
Personal exemptions are claimed for the taxpayer or the taxpayer and spouse, if married and filing together
Dependent exemptions are claimed for children or other individuals supported by the taxpayer

52. Income Tax Return Basics (Continued)
After all deductions have been made, the taxable income amount determines the tax liability
Tax liability is the amount of total tax owed on income for the year
A tax credit is an amount that is subtracted from the taxes an individual owes
Tax credits provide a greater advantage than exemptions because exemptions reduce taxable income, but a credit reduces taxes

53. Income Tax Return Basics (Continued)
Tax forms and instructions are available for download on the IRS website
Form 1040 is referred to as the long form
Form 1040A is referred to as the short form
Form 1040EZ is the simplest form to use

54. Income Tax Return Basics (Continued)
Form 1040 must be used by taxpayers with a taxable income more than $100,000
It must also be used by taxpayers who have
business or rental income
income or losses from selling assets
itemized tax deductions

55. Income Tax Return Basics (Continued)
Form 1040A can be used by taxpayers with a taxable income less than $100,000
No business income
Choose not to itemize deductions
Most taxpayers who have dependents, but are not homeowners, use this form

56. Income Tax Return Basics (Continued)
Form 1040EZ is for individuals with a taxable income less than $100,000
Must file as single or married filing jointly and claim no dependents
Income can only be from employee compensation, unemployment compensation, and interest

57. Income Tax Return Basics (Continued)
Electronic filing, or e-filing, allows filing of an income tax return online
A variety of e-filing software programs are available for purchase
The IRS also offers a free e-filing service

58. Preparing a Form 1040EZ Step 1: Personal Information Step 2: Income
Step 3: Payments, Credits, and Tax
Step 4: Tax Refund or Amount Owed
Step 5: Signature

59. Preparing a Form 1040EZ (Continued)
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60. Sources of Tax Information and Assistance
Internal Revenue Service (IRS)
Volunteer Income Tax Assistance (VITA) Program
Tax Counseling for the Elderly (TCE) Program
Tax Preparation Services
Tax Preparation Guides

61. IRS Audits
An audit is the review of financial records and statements to make sure the information is accurate as reported
A tax audit is a detailed examination of a tax return by the IRS

62. IRS Audits (Continued)
If the IRS audits your return, you have to prove the accuracy of your tax return
Answer the IRS agent’s questions honestly and completely
Provide documentation when necessary

63. IRS Audits (Continued)
You will have to pay any additional taxes, interest, and penalties that are assigned
Being accurate means to give factual, error-free information
Providing inaccurate information could extend the processing of your tax return, and may prompt an IRS investigation

64. Section 3.2 Review Who must file an income tax return?
Individuals must file a tax return when their income reaches a level established by the IRS.

65. Section 3.2 Review (Continued)
List three basic forms used to file income taxes.
A Form 1040 must be used by taxpayers with a taxable income more than $100,000. A Form 1040A can be used by taxpayers with a taxable income less than $100,000 who have no business income and who choose not to itemize deductions. A Form 1040EZ is for individuals with a taxable income less than $100,000.

66. Section 3.2 Review (Continued)
List the steps necessary to fill out a Form 1040EZ for a tax return.
Step 1: Personal Information. Step 2: Income. Step 3: Payments, Credits, and Tax. Step 4: Tax Refund or Amount Owed. Step 5: Signature.

67. Section 3.2 Review (Continued)
What kind of information does the Internal Revenue Service (IRS) provide taxpayers?
The IRS publishes free instruction booklets annually. The office also operates a system of recorded phone messages with tax information on a variety of questions. The agency offers a website and a toll-free hotline for specific questions. Walk-in service is available at some IRS offices across the country.

68. Section 3.2 Review (Continued)
Why is accuracy important when filing an income tax return?
It is important to provide accurate information on a tax return form. Being accurate means to give factual, error-free information. Providing inaccurate information could extend the processing of the tax return, delay the tax refund, and may prompt the IRS to investigate the tax return. To ensure accuracy, entries and calculations should be double checked. Being accurate also means recording truthful information. Intentionally providing false information on a tax return form is a crime.

69. 3.3
Government Spending

70. Objectives Explain the purpose of federal, state, and local taxes
Define types of tax classifications
Discuss the federal tax code
Describe the Social Security program

71. Key Terms levy mandatory expenditure Social Security Medicare
disability
Medicaid
transfer payment
discretionary expenditure
direct tax
indirect tax
progressive tax
regressive tax
proportional tax

72. Essential Question
Why do state, local, and federal government agencies impose taxes on taxpayers?

73. Government Spending
The primary purpose of taxes is paying for governmental operations, facilities, and services
Federal, state, and local governments generate revenue by taxing individuals and businesses

74. Government Spending (Continued)
To levy a tax means to use legal authority to impose a payment
Legislators may raise or lower taxes for many reasons
Stabilize the economy
Address social challenges
Influence taxpayer behavior

75. Government Spending (Continued)
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76. Government Spending (Continued)
Federal Government Spending
Taxation is the primary source of revenue for the federal government
In years when the government spends more than it collects, it must borrow money
This is called deficit spending
Deficit spending increases the national debt

77. Government Spending (Continued)
The US Treasury divides all spending into three categories
mandatory spending
discretionary spending
interest on the national debt

78. Government Spending (Continued)
Mandatory expenditures are those Congress legislated into law
Must be paid for each year
About 60 percent is for entitlements
Largest entitlement program is Social Security, followed by Medicare

79. Government Spending (Continued)
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80. Government Spending (Continued)
Social Security is a federal program that provides income when earnings are reduced or stopped because of retirement, serious illness or injury, or death
Social Security is funded by payroll taxes

81. Government Spending (Continued)
Medicare is a federal program that pays for certain health-care expenses for older citizens and others with disabilities
Medicare is funded by payroll taxes
A disability is a limitation that affects a person’s ability to function in major life activities

82. Government Spending (Continued)
Medicaid is a government program that pays certain health-care costs for eligible, low-income individuals and families
Administered by state governments
Funded by the state

83. Government Spending (Continued)
Other entitlement programs
federal employee retirement benefits
veterans’ pensions and medical care
nutrition assistance
unemployment compensation
housing assistance

84. Government Spending (Continued)
Income from entitlement program sources is:
usually not taxable
called a transfer payment
A transfer payment is a payment made to an individual from the federal government through various social benefit programs

85. Government Spending (Continued)
Discretionary spending is the portion of the budget that Congress spends through annual appropriations
A discretionary expenditure is an expense item that can be adjusted according to needs and revenues

86. Government Spending (Continued)
Two main categories of discretionary spending
National defense equips the armed forces and pays for military personnel, research, and technology
Nondefense discretionary spending includes government operations and a wide array of programs

87. Government Spending (Continued)
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88. Government Spending (Continued)
Interest on National Debt is a mandatory expense item
Must be paid, even if the government must borrow money to pay it
Paid to financial institutions, foreign investors and governments, and individuals who buy government securities

89. Government Spending (Continued)
State and Local Government Spending
Sales, real estate, and personal property taxes make up a large part of state and local revenues
Most states and localities also rely on personal and corporate income tax for a large share of their revenues

90. Government Spending (Continued)
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91. Types of Taxes Personal income tax is levied on earnings
Federal income tax
Most states also tax income
Sales tax is levied by state and local governments on purchases of goods and services
Excise tax is levied by federal and state governments on the sale and transfer of certain items

92. Types of Taxes (Continued)
Property tax is levied on property owned
Real estate tax is based on the value of land and buildings owned
Personal property taxes are assessed in some states on items such as cars, boats, furniture, and other assets

93. Types of Taxes (Continued)
Wealth tax is levied on assets
Estate tax is imposed by the federal government and must be paid out of the estate before assets are distributed for estates over a certain amount
Gift tax is levied by the federal government on donors or givers who transfer assets over a given amount to others

94. Types of Taxes (Continued)
Classification by how taxes are paid
A direct tax is paid directly to the government by the taxpayer (personal income tax)
An indirect tax is a tax levied on one person or entity, but shifted to or paid by another (sales tax)

95. Types of Taxes (Continued)
Classification by how the tax rate is applied
A progressive tax imposes a higher tax rate on those with higher incomes (income tax)
A regressive tax has the effect of imposing a higher tax rate on those with lower incomes (sales tax takes a higher percentage of income from consumers with lower incomes)

96. Types of Taxes (Continued)
Classification by how the tax rate is applied
A proportional tax imposes the same tax rate on all individuals or entities regardless of differences in income or ability to pay
Sometimes called a flat tax
Sales tax is also an example of proportional tax

97. Federal Tax Code
Major changes in tax policies can cause major changes in the economy
Tax proposals and policies are evaluated on:
effectiveness
fairness
impact

98. Social Security
President Franklin Roosevelt signed the Social Security Act into law in 1935
Medicare became part of the law in 1965
As you work, you earn Social Security credits that later determine your benefit eligibility
Usually four per year
Number required to receive benefits varies
Typically 40 credits (ten years of work)

99. Social Security (Continued)
Social Security retirement benefits
Workers become eligible for full retirement benefits at 67
Early retirement can begin as early as age 62, but with reduced retirement benefit payments

100. Social Security (Continued)
Social Security disability benefits
May be received by a worker who becomes disabled before retirement age
Worker must present evidence that the disability prevents him or her from earning a living

101. Social Security (Continued)
Social Security survivors’ benefits
May be paid to certain family members if the worker dies
A lump-sum payment may be made when a worker dies, usually to the surviving spouse

102. Social Security (Continued)
Social Security divorced people’s benefits
Former spouse can be eligible for benefits on a worker’s record under certain circumstances
Does not affect the amount of benefits the worker and the worker’s family are entitled to receive

103. Social Security (Continued)
Future of Social Security depends on responsible fiscal action today
increasing taxes
decreasing benefits
both

104. Section 3.3 Review What is the primary purpose of taxes?
Paying for government operations, facilities, and services is the primary purpose of taxes.
What is deficit spending?
In years when the government spends more than it collects, it must borrow money. This is called deficit spending, and it increases the national debt.

105. Section 3.3 Review (Continued)
Describe transfer payments as a source of income. Provide an example of a transfer payment.
A transfer payment is a payment made to an individual from the federal government through various social benefit programs. Examples of social benefit programs offered by the government include Social Security, Medicare, and Medicaid.

106. Section 3.3 Review (Continued)
List the classifications that are used for taxes.
There are different classifications of taxes. Examples are direct and indirect taxes and progressive, regressive, and proportional taxes.
What types of benefits are included in the Social Security program?
The Social Security program offers retirement, disability, survivors’, and divorced people’s benefits.