Understanding Income & Taxes Forms of Income Wage Wage Set amount of pay for every hour of work Set amount of pay for every hour of work Salary Salary.

Understanding Understanding Income & TaxesIncome & Taxes

Forms of IncomeForms of Income WageWage

Set amount of pay for Set amount of pay for every hour of workevery hour of work

SalarySalary Set amount of money paid Set amount of money paid

for a certain period of timefor a certain period of time CommissionCommission

Amount of money paid as a Amount of money paid as a percentage of sales percentage of sales

PieceworkPiecework Fixed amount of money Fixed amount of money

paid for each piece paid for each piece producedproduced

TipsTips Small amounts of money Small amounts of money

given by customers to given by customers to service-related workers in service-related workers in return for servicereturn for service

BonusBonus Extra payment in addition to Extra payment in addition to

the workers’ regular paythe workers’ regular pay Profit sharingProfit sharing

Company returns some of Company returns some of the profits to the employee the profits to the employee if the employee’s hard work if the employee’s hard work results in greater profits for results in greater profits for the companythe company

Incentive to make Incentive to make employees more productiveemployees more productive

Fringe benefitsFringe benefits Extra financial rewards, Extra financial rewards,

such as vacation time, such as vacation time, health and life insurance, or health and life insurance, or sick leavesick leave

Normally offered to full-time Normally offered to full-time employeesemployees

Understanding Your Understanding Your PaycheckPaycheck

Gross payGross pay is the total amount earned for a pay is the total amount earned for a pay period before deductions are subtracted.period before deductions are subtracted. Earned incomeEarned income is the money you receive for doing is the money you receive for doing

a job.a job.

Understanding Your Understanding Your PaycheckPaycheck

DeductionsDeductions are amounts of money subtracted are amounts of money subtracted from your total pay.from your total pay. Social security tax and federal income tax are Social security tax and federal income tax are

deducted from everyone’s paydeducted from everyone’s pay The amount of social security tax withheld is a set The amount of social security tax withheld is a set

percentage of your income.percentage of your income. The amount of federal income tax withheld depends on how The amount of federal income tax withheld depends on how

much you earn and the number of exemptions you are much you earn and the number of exemptions you are allowed.allowed.

An An exemptionexemption is a set amount of money on which you do not is a set amount of money on which you do not have to pay tax.have to pay tax.

Each exemption you claim lowers the amount of tax deducted Each exemption you claim lowers the amount of tax deducted from your paycheck.from your paycheck.

Some taxpayers can take additional exemptions for a spouse, Some taxpayers can take additional exemptions for a spouse, any dependents, blindness, and age.any dependents, blindness, and age.

Net payNet pay is gross pay minus deductions. is gross pay minus deductions. Also called Also called take-home paytake-home pay

Form Form W-4W-4

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

withhold from your paycheckwithhold from your paycheck

Taxes Deducted by Your Taxes Deducted by Your EmployerEmployer

Personal income taxPersonal income tax Appears as “Federal WH/TX” or “State Appears as “Federal WH/TX” or “State

WH/TX” on your paycheckWH/TX” on your paycheck Tax on the amount of money a person earnsTax on the amount of money a person earns

Social security taxSocial security tax Appears as FICA (Federal Insurance Appears as FICA (Federal Insurance

Contributions Act) on your paycheckContributions Act) on your paycheck Used to pay for the social security program Used to pay for the social security program

administered by the federal governmentadministered by the federal government

What is Social Security?What is Social Security?

Federal government’s program for providing Federal government’s program for providing income when family earnings are reduced or income when family earnings are reduced or stopped because of retirement, disability, or stopped because of retirement, disability, or deathdeath

Purpose is to provide a basic level or income Purpose is to provide a basic level or income that people can build on with savings, that people can build on with savings, pensions, investments, or other insurancepensions, investments, or other insurance Not intended to replace the earnings a person Not intended to replace the earnings a person

formerly receivedformerly received Help provide hospital insurance to the Help provide hospital insurance to the

elderly and disabled through the Medicare elderly and disabled through the Medicare programprogram

How Does Social Security How Does Social Security Work?Work?

Most workers pay social security taxes and are Most workers pay social security taxes and are eligible to receive benefits.eligible to receive benefits. Whatever an employee pays in social security taxes, the Whatever an employee pays in social security taxes, the

employer must pay an equal amount.employer must pay an equal amount. Before you can receive benefits, you must earn a certain Before you can receive benefits, you must earn a certain

number of number of social security creditssocial security credits, which are based on how , which are based on how much you earn.much you earn.

The amount of benefits received depends on a worker’s The amount of benefits received depends on a worker’s average earnings over a period of years and the worker’s average earnings over a period of years and the worker’s age.age.

Social security taxes deducted from your paycheck Social security taxes deducted from your paycheck pay for the benefits other receive.pay for the benefits other receive. When you retire, become disabled, or die, the taxes of When you retire, become disabled, or die, the taxes of

others will pay for the benefits you and your family will others will pay for the benefits you and your family will receive.receive.

Social security benefits do not start automatically – Social security benefits do not start automatically – must be applied for at nearest social security office.must be applied for at nearest social security office.

Benefits Provided by Social Benefits Provided by Social SecuritySecurity

Retirement BenefitsRetirement Benefits Workers become eligible for full benefits at age 65.Workers become eligible for full benefits at age 65. Workers may retire as early as age 62, but they Workers may retire as early as age 62, but they

receive lower benefits.receive lower benefits. Disability BenefitsDisability Benefits

Provided for workers who become severely disabled Provided for workers who become severely disabled before age 65before age 65

Physical or mental condition that prevents worker from Physical or mental condition that prevents worker from working and is expected to last for at least 12 months or working and is expected to last for at least 12 months or result in deathresult in death

Benefits continue for as long as worker is disabled Benefits continue for as long as worker is disabled After a worker has been disabled for two years, After a worker has been disabled for two years,

he/she becomes eligible for Medicare benefitshe/she becomes eligible for Medicare benefits Benefits may also be paid to disabled worker’s Benefits may also be paid to disabled worker’s

children and/or spouse under certain conditionschildren and/or spouse under certain conditions

Benefits Provided by Social Benefits Provided by Social SecuritySecurity

Survivors’ BenefitsSurvivors’ Benefits Paid to certain family members when a worker diesPaid to certain family members when a worker dies Can be paid in a single lump sum or monthly Can be paid in a single lump sum or monthly

Medicare BenefitsMedicare Benefits Medicare Medicare is a health insurance program reserved for is a health insurance program reserved for

people 65 or older, people of any age with permanent people 65 or older, people of any age with permanent kidney failure, and certain people with disabilities.kidney failure, and certain people with disabilities.

Created to provide these groups with affordable healthcareCreated to provide these groups with affordable healthcare Hospital insurance helps pay for inpatient hospital care, Hospital insurance helps pay for inpatient hospital care,

inpatient care in a skilled nursing facility, and home inpatient care in a skilled nursing facility, and home health care.health care.

Medical insurance helps pay for physicians’ services, Medical insurance helps pay for physicians’ services, outpatient health care, and outpatient physical therapy.outpatient health care, and outpatient physical therapy.

Patients must pay annual Patients must pay annual deductiblesdeductibles, a set dollar , a set dollar amount the patient must pay before Medicare with pay a amount the patient must pay before Medicare with pay a claim.claim.

Benefits Provided by Social Benefits Provided by Social SecuritySecurity

Medicaid BenefitsMedicaid Benefits Medicaid is another health care program funded by Medicaid is another health care program funded by

the government for people who can’t pay, such as the government for people who can’t pay, such as low-income people who are aged, blind, or disabled.low-income people who are aged, blind, or disabled.

People receiving public assistance or incomes below the People receiving public assistance or incomes below the levels set by the state are eligible.levels set by the state are eligible.

Patients must apply in the state where they live to Patients must apply in the state where they live to receive benefits.receive benefits.

Cover hospital, laboratory, and clinic servicesCover hospital, laboratory, and clinic services Some states pay for other services, such as dental Some states pay for other services, such as dental

care, eye care, home health care, and family care, eye care, home health care, and family planning.planning.

Financed with federal, state, and local funds but Financed with federal, state, and local funds but managed by participating states.managed by participating states.

Taxes You Pay DirectlyTaxes You Pay Directly Property taxProperty tax

Tax on the value of personal property and real estate a Tax on the value of personal property and real estate a person ownsperson owns

Personal items, such as houses, land, cars, boats, home Personal items, such as houses, land, cars, boats, home furnishings, and expensive jewelryfurnishings, and expensive jewelry

Assessed by city, county, and/or state governmentsAssessed by city, county, and/or state governments Sales taxSales tax

Tax on goods and services paid at the time of purchasesTax on goods and services paid at the time of purchases May be charged by states and/or citiesMay be charged by states and/or cities Food and drugs may be exempt in some statesFood and drugs may be exempt in some states

Excise taxExcise tax Tax placed on products, such as gasoline, cigarettes, Tax placed on products, such as gasoline, cigarettes,

liquor, and telephone serviceliquor, and telephone service Can be charged by city, state, and/or federal Can be charged by city, state, and/or federal

governmentsgovernments

Other TaxesOther Taxes Sometimes the five basic types of taxes may fit one or more Sometimes the five basic types of taxes may fit one or more

classifications.classifications. Direct taxesDirect taxes are those charged directly to the taxpayer. are those charged directly to the taxpayer.

EX: Personal income taxes, property taxes, and sales taxesEX: Personal income taxes, property taxes, and sales taxes Indirect taxesIndirect taxes are taxes that are included in the price of taxed are taxes that are included in the price of taxed

items.items. EX: Excise taxes on cigarettes and gasolineEX: Excise taxes on cigarettes and gasoline

Progressive taxesProgressive taxes take a greater share of income from the rich take a greater share of income from the rich than the poor.than the poor.

EX: Income tax EX: Income tax As a person’s income increases, so does the amount of tax paid because with 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.greater income, there’s more pay to tax, and the tax rate itself increases.

Regressive taxesRegressive taxes take a lower percentage of income from the rich take a lower percentage of income from the rich than the poor.than the poor.

EX: Sales tax EX: Sales tax People with high incomes pay a smaller percentage of their incomes for sales People with high incomes pay a smaller percentage of their incomes for sales taxes than people with low incomes.taxes than people with low incomes.

Employers pay taxes, too.Employers pay taxes, too. Worker’s CompensationWorker’s Compensation Unemployment InsuranceUnemployment Insurance

What is Worker’s What is Worker’s Compensation?Compensation?

Insurance program Insurance program managed by states managed by states to provide to provide payments to payments to workers when they workers when they are injured or are injured or killed on the job.killed on the job. Diseases caused by Diseases caused by

working conditions working conditions are also covered.are also covered.

Premiums are paid Premiums are paid by the employer to by the employer to the state.the state.

Medical care benefitsMedical care benefits cover the cost cover the cost of all medical expenses, usually of all medical expenses, usually without any time or cost limitations.without any time or cost limitations.

Disability income benefitsDisability income benefits are paid are paid to workers at a rate of 2/3 of their to workers at a rate of 2/3 of their average weekly wage until they return average weekly wage until they return to work.to work. Permanently disabled workers receive Permanently disabled workers receive

payments for the rest of their lives.payments for the rest of their lives. Rehabilitation benefitsRehabilitation benefits are provided are provided

for workers who must give up their for workers who must give up their jobs due to injuries.jobs due to injuries. Medical and vocational rehabilitation, Medical and vocational rehabilitation,

which includes training, counseling, and which includes training, counseling, and job placement, are available.job placement, are available.

Death benefitsDeath benefits are provided to are provided to surviving spouse or children of a surviving spouse or children of a deceased worker. deceased worker. Amount based on the worker’s average Amount based on the worker’s average

wage but varies from state to statewage but varies from state to state

What is Unemployment What is Unemployment Insurance?Insurance?

Provides benefits to workers who have lost their jobsProvides benefits to workers who have lost their jobs To receive benefits, unemployed workers must have lost To receive benefits, unemployed workers must have lost

their job through no fault of their own.their job through no fault of their own. Benefits are temporary, usually no more than six Benefits are temporary, usually no more than six

months, and are based on length of employment and months, and are based on length of employment and amount of earningsamount of earnings

Purpose is to provide some income security until Purpose is to provide some income security until workers find new jobs or are rehired by their workers find new jobs or are rehired by their employeremployer In most cases, benefits amount to one-half of the employee’s In most cases, benefits amount to one-half of the employee’s

normal full-time pay, and all wages are taxable.normal full-time pay, and all wages are taxable. Employers, NOT EMPLOYEES, are taxed by the state Employers, NOT EMPLOYEES, are taxed by the state

to help fund the program.to help fund the program.

W-2 FormW-2 Form

In January of each year, you will receive In January of each year, you will receive a Wage and Tax Statement called a a Wage and Tax Statement called a W-2 W-2 FormForm, which shows:, which shows: Amount you were paid Amount you were paid

in the previous yearin the previous year Amounts of income Amounts of income

tax and social security tax and social security tax withheld during tax withheld during the yearthe year

Check Your UnderstandingCheck Your Understanding

1.1. What was Nicholas's net income (income less all What was Nicholas's net income (income less all taxes)?taxes)?  

2.2. How much did Nicholas pay in Federal income tax?How much did Nicholas pay in Federal income tax?3.3. What was Nicholas's gross income?What was Nicholas's gross income?4.4. How much did Nicholas pay in Medicare taxes?How much did Nicholas pay in Medicare taxes?5.5. What is Nicholas's social security number?What is Nicholas's social security number?6.6. What was the State tax rate?What was the State tax rate?7.7. What was the Federal income tax rate?What was the Federal income tax rate?8.8. How much did Nicholas earn this year?How much did Nicholas earn this year?9.9. How much did Nicholas pay in State taxes?How much did Nicholas pay in State taxes?10.10. How much did Nicholas pay in Social Security taxes?How much did Nicholas pay in Social Security taxes?

Check Your AnswersCheck Your Answers

1.1. Net Income =$21,393.38   - $1,613.58 (state) Net Income =$21,393.38   - $1,613.58 (state) = $19,769.80= $19,769.80

2.2. Federal Tax =$3,496.09  Federal Tax =$3,496.09  

3.3. Gross Income =$26,893.00  Gross Income =$26,893.00  

4.4. Medicare Tax =$389.95  Medicare Tax =$389.95  

5.5. SS# =817-82-9089  SS# =817-82-9089  

6.6. State tax rate =6%  State tax rate =6%  

7.7. Federal tax rate =13%  Federal tax rate =13%  

8.8. Earned =$26,893.00  Earned =$26,893.00  

9.9. State Taxes =$1,613.58  State Taxes =$1,613.58  

10.10. SS Tax =$1,613.58 SS Tax =$1,613.58

Getting Ready for TaxesGetting Ready for Taxes

1.1. Get all your financial records together.Get all your financial records together. Records of income including wages, tips, and taxable benefitsRecords of income including wages, tips, and taxable benefits Records of interest earned and dividends receivedRecords of interest earned and dividends received Canceled checks for expenses entered on tax returns as Canceled checks for expenses entered on tax returns as

deductionsdeductions Interest payment records for a home mortgageInterest payment records for a home mortgage Past tax returnsPast tax returns

2.2. Read all the instructions carefully before beginning.Read all the instructions carefully before beginning.

3.3. Prepare the form in pencil first so any errors can be Prepare the form in pencil first so any errors can be erased easily. erased easily. Before writing the final copy in ink, check your mater or have Before writing the final copy in ink, check your mater or have

someone else check it.someone else check it.

4.4. Make a copy of the completed form and keep it with Make a copy of the completed form and keep it with other important papers.other important papers.

Common Tax FormsCommon Tax Forms 1040EZ & 1040A1040EZ & 1040A

Called Called short formsshort forms because they because they are the quickest and easiest to are the quickest and easiest to filefile

May be used by taxpayers whose May be used by taxpayers whose income falls within certain limits income falls within certain limits and who do not choose to itemize and who do not choose to itemize deductionsdeductions

10401040 Called the Called the long form long form because it because it

requires more information and requires more information and more time to preparemore time to prepare

Usually requires additional tax Usually requires additional tax forms to be filed with itforms to be filed with it

Must be used by all other Must be used by all other taxpayerstaxpayers

Forms can be Forms can be obtained obtained from:from: Post officesPost offices BanksBanks Public Public

librarieslibraries IRSIRS

Preparing Tax ReturnsPreparing Tax Returns On a tax return, you must list:On a tax return, you must list:

All income from wages, salaries, tips, and bonusesAll income from wages, salaries, tips, and bonuses Any money made from savings accounts, stocks, Any money made from savings accounts, stocks,

bonds, and other financial investmentsbonds, and other financial investments Deductions, adjustments to income, and tax Deductions, adjustments to income, and tax

credits are all expenses taxpayers can claim to credits are all expenses taxpayers can claim to lower their tax bills.lower their tax bills. Charitable contributionsCharitable contributions Interest on some loansInterest on some loans Some medical/dental expensesSome medical/dental expenses Certain financial lossesCertain financial losses AlimonyAlimony Certain retirement deductionsCertain retirement deductions Care required for children, elderly, and/or disabledCare required for children, elderly, and/or disabled

Filing Your ReturnFiling Your Return The final date for filing tax returns is APRIL 15.The final date for filing tax returns is APRIL 15.

If that date falls on a Saturday, Sunday, or legal If that date falls on a Saturday, Sunday, or legal holiday, returns are due on the next business day.holiday, returns are due on the next business day.

If you file late, you may have to pay penalties If you file late, you may have to pay penalties and interest fees.and interest fees.

Returns may be filed by:Returns may be filed by: Mail – mail to the IRS Center for your stateMail – mail to the IRS Center for your state ElectronicallyElectronically

Tax serviceTax service Directly from your computerDirectly from your computer

Telephone – must meet certain income and Telephone – must meet certain income and deductions criteriadeductions criteria