1. Earned Income and Benefits
Personal Financial Literacy - Chapter 2 Section 1
GOALS:
List and discuss types of earned income, such as wages, salaries, tips, and commissions
Discuss the advantages and disadvantages of self-employment
Describe employee benefits and their role in employee compensation

2. What are sources of Earned Income?
Income from sources such as: hourly wages, annual salary, tips, commission, self-employment income.
Earned income is subject to income taxes and social security taxes
Tax – a required payment for the support of a government
May be based on earnings, property values, or sales price of an item

3. Wages Payment for each hour worked Minimum wage
The lowest pay rate allowed by law for each regular hour of work
Federal minimum wage is set by U.S. Congress
Current minimum wage: $7.25 per hour
19 states (+ Washington, D.C.) have minimum wage rates higher than the federal rate

4. Wages Standard work week 8-hour day 40-hour workweek
Hours worked in addition to the standard are called overtime hours and subject to overtime pay
In most states, overtime pay is for work over 40 hours in one pay week. Some states require overtime pay for more than 8 hours in a workday
Overtime pay
Pay received for hours worked in addition to regular hours

5. Wages Overtime pay must be at least 1.5 times the regular rate.
Example: If a worker earns $8 for regular pay, what would his overtime rate be?
$8*1.5 = $12
Holiday pay
Some states may require overtime pay on holidays that you are required to work (PA is not one of them)
Some employers will pay overtime pay on select Federal holidays

6. Salaries Some people work for a set salary
Example: $30,000 annually
Salaried workers do not keep time cards or count hours worked
Some salaried workers have more flexibility in the times they work than hourly workers do.
Many salaried workers work more than 40 hours a week, but do not receive overtime pay
People on salary are generally self-directed
Managers, supervisors, professional occupations are generally paid a salary.

7. Tips and Commissions Tip
A gift of money, often a percentage of the total bill, to a person for performing a service.
May be based on the quality of the service provided.
Waiter
Caddy
Tips are subject to federal income taxes
May be subject to state income taxes
Law requires some employers to withhold taxes based on tips, even though tips may have been received in cash directly from customers.

8. Tips and Commissions Commission
A set fee or percentage of a sale paid to an employee instead of or in addition to salary or wages
Sales commissions are earned only when a sale is made
No sale = No commission
Some jobs may be entirely based on commission
Ex. Real Estate Sales
Some jobs a combination of base salary plus commission

9. Self-Employment Working for yourself Entrepreneur
A person who takes the risks of being self- employed and owning a business

10. Advantages of Owning a Business
You get to make the decisions about how the business is run.
Choose products and services that will be offered
Set hours of operation
Decide what types of customers the business will target
Set prices
Other benefits of being a small business owner:
Set your own hours
Keep the profits of the business
Profit – the amount left after all expenses are deducted from the revenues or sales of the business

11. Disadvantages of Owning a Business
If the business fails, the money invested in the business is lost
Most money invested in a small business comes from the owner and/or the owner’s family and friends
Difficult to get credit
Owner may have to use personal credit in order to get and keep the business running
Long hours
Many different job tasks in order to keep the business running

12. Types of Small Businesses
Lifestyle Business
One where the owner intends to keep the business small.
Provides good income for the owner and his/her family
Exist for the lifetime of the owner
Often have no resale value
Examples
A single doctor/dentist practice
A side job that one enjoys (or avocation) while still working a full-time job

13. Types of Small Businesses
Venture Business
The owners want their business to grow into a large company with unlimited growth and many workers
As it continues to grow, it will eventually become a corporation
A venture business owner has an “exit plan” so that the business can continue operation when the owner decides to leave.
Business owner may become one of many stockholders and no longer have total control of the business
Example: Phil Knight started designing tennis shoes in his garage in Eugene, OR… NOW:
Nike

14. Getting Started in Business
Entrepreneurship may be encouraged by:
Culture
People whose parents owned small businesses are more likely to start a business than people whose parents worked for someone else.
Many entrepreneurs start out working for other business to gain knowledge and experience and/or informal education about how to run a business before they get started.

15. Getting Started in Business
Small Business Development Center (SBDC)
Exist to assist entrepreneurs getting started
Sponsored and funded by the Small Business Administration (SBA)

16. How can you decide if being an entrepreneur is right for you?
Are you self-motivated?
If you can get going and do what you need to do without being told or reminded, you will make a good entrepreneur.
Do you like people?
If you like people and can get along with your customers, you have a good chance of success
Are you a leader?
Entrepreneurs are able to get others to follow their lead. They are confident and persuasive.

17. How can you decide if being an entrepreneur is right for you?
Do you take responsibility?
Entrepreneurs take charge and follow through.
Are you organized?
Business owners must have a good plan before they get started. They line up their resources, fill in the gaps, and charge forward.
Do you work hard?
To be a successful owner, you must set the pace by example. Business owners work many long, hard hours. They don’t expect others to do that they themselves are unwilling to do.

18. How can you decide if being an entrepreneur is right for you?
Do you make decisions easily and quickly?
Owners must take risks and be willing to accept the consequences. Decisions sometimes have to be made without complete information.
Are you trustworthy?
Others must trust you and accept that you know what you are talking about. This means building trust and long-term relationships.

19. How can you decide if being an entrepreneur is right for you?
Are you persistent?
Business owners stick with it, even when the going gets tough. They finish projects and forget about excuses.
Do you keep good records?
Entrepreneurs must account for their costs and their revenues. They must pay taxes and understand about profitability and cost analysis.

20. Business Plans Business plan
A document that describes the steps that will be taken to open and operate a business
Should show that you are worthy of funding (loans) from government and private sources, such as banks and venture capitalists.
Sample business plans can be found on the SBA website.

21. What are employee benefits?
Forms of pay other than salary or wages
Examples:
paid vacation, holidays, health insurance
Some are paid by the company. For others, the employee may need to pay part or all of the cost.
When workers are paying for a portion or all of the benefit, they may want a plan that allows them to choose the options they need in order to save money. This type of plan is known as a cafeteria plan

22. Employee Benefits
Benefits increase the overall value a worker receives from a job.
Benefits can increase a person’s disposable income
Disposable income
Money available to spend or save after taxes have been paid
Examples:
Direct impact: profit sharing plans
Indirect impact: health insurance through a company plan may be cheaper than an individual policy

23. Employee Benefits
Benefits are also important for several other reasons:
Workers are not taxed on most benefits
Some benefits allow workers to buy services at a cheaper price than they could otherwise.
Group insurance costs much less than an individual policy. Paying a lower cost for insurance increases the worker’s disposable income.
Some benefits offered to workers may not be available to individuals
Company retirement plans; stock options

24. Employee Benefits
Some benefits offered to workers may not be affordable at individual prices.
Workers with health problems may not be able to afford insurance at individual rates or may even be denied coverage at all.
Some benefits help workers reach financial goals.
Saving money
Company sponsored savings plans
Savings is easier because the money is automatically deducted from the worker’s paycheck
One type – 401(k)

25. Pay Without Work
Refers to times when an employee who is not working will be paid
Paid vacations
A certain number of work days allowed each year
Paid holidays
Examples:
Thanksgiving Day
Christmas Day
Labor Day
Employees who choose or are required to work designated holidays are usually paid extra – typically 1.5 – 2 times the regular rate

26. Pay Without Work Sick leave Paid time away from work due to illness
Some companies allow sick time to be used for illness of a child or other family member
Some companies allow sick time to accumulate.
This means that employees may be allowed to save any unused sick time for one year and have it available in another year in the event of extended illness.

27. Pay Without Work Personal Leave
Paid time away from work for personal reasons
If offered, typically 2-3 days per year
Generally not carried forward to another year

28. Educational Benefits
Some employers will pay for, share the cost of, or pay back (reimburse) money spent on education
Classes or training related to the worker’s job
Benefit the company and employee
Improve the employee’s chances of getting a promotion or a better job with the same or different company
Some companies will pay for classes taken to earn a college degree
Typically a percentage, depending on the grade earned.

29. Perks
Other benefits that provide emotional satisfaction or social status rather than money
Prime parking space
Office with a view
Expense account
Company car
Perks may or may not be taxable

30. Insurance Health Insurance Health insurance is an important benefit
The price paid for health insurance is called a premium.
Most employees pay part or all of their insurance premium through payroll deduction
Benefits of company offered group plan
Group rates are typically lower than individual
Acceptance into the program is guaranteed
Premiums vary depending on the coverage provided.
Plans vary and may or may not include dental and vision insurance.

31. Insurance Group Life Insurance Often available through an employer
Premium may be paid by the employer or the employee
Some companies pay for a set amount of life insurance.
Usually 1.5 – 2 times the employee’s annual salary
Employee may be able to purchase additional insurance at the group rate
Life insurance paid for by the employee may be portable.
Means that the employee may continue the policy after leaving the employer

32. Insurance Disability Insurance
Provides payments to replace income lost when illness or injury prevents the employee from working
Short-term disability
Up to 2 years
Often paid for by the employer
Long-term disability
Typically covers periods longer than two years and up to retirement

33. Insurance Workers’ Compensation
An insurance plan that employers are required by law to provide for employees.
Pays medical and disability benefits to workers who are injured or contract diseases on the job
Benefits may be paid to the worker’s family if the worker is killed on the job.

34. Retirement Plans Retirement Plan Defined Contribution Plan
An account into which employees contribute a portion of their earnings for their retirement; employers may match these contributions
Defined Contribution Plan
Example: 401(k)
Pre-tax
Employees do not pay income tax on the money in the account until it is withdrawn
Employer may match a percentage
Contributions are automatically deducted from the employee’s paycheck

35. Retirement Plans Defined Benefit Plan
Also referred to as a pension plan
Paid by the employer
Typically, employees must work for a company for a certain number of years to qualify
Payment amounts vary depending on:
the number of years worked
Worker’s salary
Other factors
This is being phased out by many companies in favor of a defined contribution plan

36. Profit-Sharing Plans Profit-sharing plan
A benefit whereby employees may share in the profits of the business
The plan may:
Pay a bonus of a specified percent of the employee’s salary if the business meets or exceeds its financial goals
May be paid in cash – taxable the year it is received
May be added to retirement account – taxable when withdrawn by the employee

37. Stock Option Plans
Some companies allow employees to purchase company stock at a reduced price.
Purchase price may be deducted from the employee’s pay
Convenient way to acquire stock and does not involve brokerage or trading fees

38. Heath Flexible Spending Accounts
Often called a Flex 125 plan
Allows employees to set aside money to pay for qualified medical expenses
Pretax
Deducted from employees paycheck
Employee files claims for qualified expenses to be paid
Main disadvantage – if the employee does not use the money in the account by the end of the year, he/she loses it (to the employer).

39. Health Spending Accounts
Can be used by employees with high-deductible health insurance plans
These plans are gaining popularity because they have lower premiums
HSAs are usually managed by banks or investment companies
Money earns interest
Typically, medical expenses are paid using a debit card that accesses the HSA
Money not used can be carried forward to the next year
When an employee leaves a job, they can take their HSA with them

40. Optional Deductions
Other amounts withdrawn from an employee’s paycheck
Money donated to charity
Savings account
Investment accounts
Employer withholds money from paycheck and sends it to the desired source
Usually after taxes have been paid on it