1. Understanding Income & Taxes

2. Forms of Income Wage Salary Commission Piecework Tips Bonus
Set amount of pay for every hour of work
Salary
Set amount of money paid for a certain period of time
Commission
Amount of money paid as a percentage of sales
Piecework
Fixed amount of money paid for each piece produced
Tips
Small amounts of money given by customers to service-related workers in return for service
Bonus
Extra payment in addition to the workers’ regular pay
Profit sharing
Company returns some of the profits to the employee if the employee’s hard work results in greater profits for the company
Incentive to make employees more productive
Fringe benefits
Extra financial rewards, such as vacation time, health and life insurance, or sick leave
Normally offered to full-time employees

3. Understanding Your Paycheck
Gross pay is the total amount earned for a pay period before deductions are subtracted.
Earned income is the money you receive for doing a job.

4. Understanding Your Paycheck
Deductions are amounts of money subtracted from your total pay.
Social security tax and federal income tax are deducted from everyone’s pay
The amount of social security tax withheld is a set percentage of your income.
The amount of federal income tax withheld depends on how much you earn and the number of exemptions you are allowed.
An exemption is a set amount of money on which you do not have to pay tax.
Each exemption you claim lowers the amount of tax deducted from your paycheck.
Some taxpayers can take additional exemptions for a spouse, any dependents, blindness, and age.
Net pay is gross pay minus deductions.
Also called take-home pay

5. Form W-4
When you begin a job, your employer will ask you to fill out a W-4 Form.
Helps employer determine how much tax to withhold from your paycheck

6. Taxes Deducted by Your Employer
Personal income tax
Appears as “Federal WH/TX” or “State WH/TX” on your paycheck
Tax on the amount of money a person earns
Social security tax
Appears as FICA (Federal Insurance Contributions Act) on your paycheck
Used to pay for the social security program administered by the federal government

7. What is Social Security?
Federal government’s program for providing income when family earnings are reduced or stopped because of retirement, disability, or death
Purpose is to provide a basic level or income that people can build on with savings, pensions, investments, or other insurance
Not intended to replace the earnings a person formerly received
Help provide hospital insurance to the elderly and disabled through the Medicare program

8. How Does Social Security Work?
Most workers pay social security taxes and are eligible to receive benefits.
Whatever an employee pays in social security taxes, the employer must pay an equal amount.
Before you can receive benefits, you must earn a certain number of social security credits, which are based on how much you earn.
The amount of benefits received depends on a worker’s average earnings over a period of years and the worker’s age.
Social security taxes deducted from your paycheck pay for the benefits other receive.
When you retire, become disabled, or die, the taxes of others will pay for the benefits you and your family will receive.
Social security benefits do not start automatically – must be applied for at nearest social security office.

9. Benefits Provided by Social Security
Retirement Benefits
Workers become eligible for full benefits at age 65.
Workers may retire as early as age 62, but they receive lower benefits.
Disability Benefits
Provided for workers who become severely disabled before age 65
Physical or mental condition that prevents worker from working and is expected to last for at least 12 months or result in death
Benefits continue for as long as worker is disabled
After a worker has been disabled for two years, he/she becomes eligible for Medicare benefits
Benefits may also be paid to disabled worker’s children and/or spouse under certain conditions

10. Benefits Provided by Social Security
Survivors’ Benefits
Paid to certain family members when a worker dies
Can be paid in a single lump sum or monthly
Medicare Benefits
Medicare is a health insurance program reserved for people 65 or older, people of any age with permanent kidney failure, and certain people with disabilities.
Created to provide these groups with affordable healthcare
Hospital insurance helps pay for inpatient hospital care, inpatient care in a skilled nursing facility, and home health care.
Medical insurance helps pay for physicians’ services, outpatient health care, and outpatient physical therapy.
Patients must pay annual deductibles, a set dollar amount the patient must pay before Medicare with pay a claim.

11. Benefits Provided by Social Security
Medicaid Benefits
Medicaid is another health care program funded by the government for people who can’t pay, such as low-income people who are aged, blind, or disabled.
People receiving public assistance or incomes below the levels set by the state are eligible.
Patients must apply in the state where they live to receive benefits.
Cover hospital, laboratory, and clinic services
Some states pay for other services, such as dental care, eye care, home health care, and family planning.
Financed with federal, state, and local funds but managed by participating states.

12. Taxes You Pay Directly Property tax Sales tax Excise tax
Tax on the value of personal property and real estate a person owns
Personal items, such as houses, land, cars, boats, home furnishings, and expensive jewelry
Assessed by city, county, and/or state governments
Sales tax
Tax on goods and services paid at the time of purchases
May be charged by states and/or cities
Food and drugs may be exempt in some states
Excise tax
Tax placed on products, such as gasoline, cigarettes, liquor, and telephone service
Can be charged by city, state, and/or federal governments

13. Other Taxes
Sometimes the five basic types of taxes may fit one or more classifications.
Direct taxes are those charged directly to the taxpayer.
EX: Personal income taxes, property taxes, and sales taxes
Indirect taxes are taxes that are included in the price of taxed items.
EX: Excise taxes on cigarettes and gasoline
Progressive taxes take a greater share of income from the rich than the poor.
EX: Income tax As a person’s income increases, so does the amount of tax paid because with greater income, there’s more pay to tax, and the tax rate itself increases.
Regressive taxes take a lower percentage of income from the rich than the poor.
EX: Sales tax People with high incomes pay a smaller percentage of their incomes for sales taxes than people with low incomes.
Employers pay taxes, too.
Worker’s Compensation
Unemployment Insurance

14. What is Worker’s Compensation?
Insurance program managed by states to provide payments to workers when they are injured or killed on the job.
Diseases caused by working conditions are also covered.
Premiums are paid by the employer to the state.
Medical care benefits cover the cost of all medical expenses, usually without any time or cost limitations.
Disability income benefits are paid to workers at a rate of 2/3 of their average weekly wage until they return to work.
Permanently disabled workers receive payments for the rest of their lives.
Rehabilitation benefits are provided for workers who must give up their jobs due to injuries.
Medical and vocational rehabilitation, which includes training, counseling, and job placement, are available.
Death benefits are provided to surviving spouse or children of a deceased worker.
Amount based on the worker’s average wage but varies from state to state

15. What is Unemployment Insurance?
Provides benefits to workers who have lost their jobs
To receive benefits, unemployed workers must have lost their job through no fault of their own.
Benefits are temporary, usually no more than six months, and are based on length of employment and amount of earnings
Purpose is to provide some income security until workers find new jobs or are rehired by their employer
In most cases, benefits amount to one-half of the employee’s normal full-time pay, and all wages are taxable.
Employers, NOT EMPLOYEES, are taxed by the state to help fund the program.

16. W-2 Form
In January of each year, you will receive a Wage and Tax Statement called a W-2 Form, which shows:
Amount you were paid in the previous year
Amounts of income tax and social security tax withheld during the year

17. Check Your Understanding
What was Nicholas's net income (income less all taxes)? 
How much did Nicholas pay in Federal income tax?
What was Nicholas's gross income?
How much did Nicholas pay in Medicare taxes?
What is Nicholas's social security number?
What was the State tax rate?
What was the Federal income tax rate?
How much did Nicholas earn this year?
How much did Nicholas pay in State taxes?
How much did Nicholas pay in Social Security taxes?

18. Check Your Answers
Net Income =$21,   - $1, (state) = $19,769.80
Federal Tax =$3,  
Gross Income =$26,  
Medicare Tax =$  
SS# =  
State tax rate =6%  
Federal tax rate =13%  
Earned =$26,  
State Taxes =$1,  
SS Tax =$1,613.58

19. Getting Ready for Taxes
Get all your financial records together.
Records of income including wages, tips, and taxable benefits
Records of interest earned and dividends received
Canceled checks for expenses entered on tax returns as deductions
Interest payment records for a home mortgage
Past tax returns
Read all the instructions carefully before beginning.
Prepare the form in pencil first so any errors can be erased easily.
Before writing the final copy in ink, check your mater or have someone else check it.
Make a copy of the completed form and keep it with other important papers.

20. Common Tax Forms 1040EZ & 1040A 1040 Forms can be obtained from:
Called short forms because they are the quickest and easiest to file
May be used by taxpayers whose income falls within certain limits and who do not choose to itemize deductions
1040
Called the long form because it requires more information and more time to prepare
Usually requires additional tax forms to be filed with it
Must be used by all other taxpayers
Forms can be obtained from:
Post offices
Banks
Public libraries
IRS

21. Preparing Tax Returns On a tax return, you must list:
All income from wages, salaries, tips, and bonuses
Any money made from savings accounts, stocks, bonds, and other financial investments
Deductions, adjustments to income, and tax credits are all expenses taxpayers can claim to lower their tax bills.
Charitable contributions
Interest on some loans
Some medical/dental expenses
Certain financial losses
Alimony
Certain retirement deductions
Care required for children, elderly, and/or disabled

22. Filing Your Return The final date for filing tax returns is APRIL 15.
If that date falls on a Saturday, Sunday, or legal holiday, returns are due on the next business day.
If you file late, you may have to pay penalties and interest fees.
Returns may be filed by:
Mail – mail to the IRS Center for your state
Electronically
Tax service
Directly from your computer
Telephone – must meet certain income and deductions criteria