Taxes and Your Paycheck

Chapter 5

Payroll Taxes

• Payroll Taxes are taxes based on the payroll of a business

• These taxes are paid to the government by you and your employer

• Payroll Taxes include income taxes and social security taxes.

Income Taxes

• Income Taxes are taxes you pay on most type of income you receive.

• Income taxes are not a fixed percentage of income that all Americans.

• The amount varies, depending on each taxpayer’s financial and family situation.

• Some taxes on income support social programs.

2011 Federal Tax Rate

Virginia Tax Rates

IF YOUR VIRGINIA TAXABLE INCOME IS:Not over $3,000, your tax is 2% of your Virginia taxable income.

but not your tax of excessover— over— I s— over—$ 3,000 $ 5,000 $ 60 + 3 % $ 3,000$ 5,000 $ 17,000 $ 120 + 5 % $ 5,000$ 17,000 $ 720 + 5.75 % $ 17,000

ExampleIf your taxable income is $90,000, your tax is $720 + 5.75% of the amount over $17,000.This equals $720 + (.0575 x $73,000) = $720 + $4,197.50 = $4,917.50 which should be rounded to $4,918.

FICA

• Federal Insurance Contribution Act

• The law that requires workers to contribute to social security and Medicare.

Withholding

• Your employer collects payroll taxes by deducting or withholding money from your wages.

• Withholding enables the government to collect taxes at a steady rate, rather than at the end of the year.

• Withholding also makes it more likely that people will pay their taxes.

Your pay stub

• Your pay stub is always attached to your pay check

Your pay Stub

• Gross income is the amount you earn before taxes are withheld.

• Net Income is the amount you receive after withholdings are subtracted from your gross pay.

Form W-4

• When you are hired your employer will ask you to complete federal form W-4.

• Form W-4 provides the information your employer needs to determine the proper amount to withhold

from your paycheck.

Your Responsibility for Proper Withholding

• If the amount withheld from your paycheck during the year is not close to the total tax you owe, the Internal Revenue Service may fine you.

• The Internal Revenue Service (IRS) is the federal agency that collects income taxes.

Allowances

• A worksheet provided with your W-4 tells you how to calculate the number of allowances you should claim.

• An allowance is a number that reduces the amount of money withheld from your paycheck.

• The larger the number of allowances you claim, the smaller the amount withheld.

Questions

• How do you and other taxpayers benefit from the taxes you pay?

• What are payroll taxes?• What is the purpose of Form W-4?• In what type of situations should you

consider claiming extra allowances?• What is your main goal in determining how

many allowances to claim?

Your Income Tax Return

• A tax return is a set of forms that taxpayers use to calculate their tax obligation.

• Income– Wages– Tips– Interest

Sources of Information for Your Tax Return

• Form W-2– This form is a summary of your earnings and

withholdings for the year for a job.

Sources of Information for Your Tax Return

• Form 1099-INT– This form is a statement of the interest your

bank paid on your savings that year.

Income Tax Forms

• Form 1040EZ– You must meet these criteria to use this form

Fill Out the 1040EZ• Identify Yourself

– Social Security Number

• Income– Your income today is

$64,250.00– Your Taxable Interest is

$148.35

• Unemployment Compensation– This amount is $0.00

• Adjusted Gross Income– Amount of all above added

together

Fill Out the 1040EZ• Determine Your

Dedications– Yours is $9350

because you are single• Your Taxable Income

– Adjusted Gross – Deductions

• Federal Income Tax Withheld– $10,835

• Did you get a refund?

Questions

• What information do you need to complete a Form 1040EZ, and where does it come from?

• What is the difference between adjusted gross income and taxable income?

• Why should you check your work before filing your tax return?

Taxes and Government

• Contributions to Social Security– Under FICA regulations, workers’ wages are

taxed at a rate of 6.20%– This percentage is collected on gross income

up to a maximum level that is adjusted each year.

– In 1999 the maximum income taxable for social security was 72,800.

Taxes and Government Cont.

• Contributions to Medicare– An additional 1.45%is taken on all earned

income to pay for the Medicare program.• Your Employer’s Contribution

– Employers match employees’ payments for social security and Medicare.

– For each dollar you earn up to the maximum amount, 15.3 cents goes to the government for these taxes.

Sources of Federal Government Income

Taxes and Income

• There are 3 ways taxes are based on share of income they take as people’s income change– Progressive Tax

• Takes a larger share of income as the amount of income grows.

• Someone who makes $25,000 would pay 15% while someone who made $350,000 would pay 39.6%

Taxes and Income

• Regressive taxes– These taxes take a smaller share of income as

the amount of income grows.• Sales Tax

– Joe 20,000 (pays 6% on 10,000 car) 3 percent of his income

– Sally 50,000 (pays 6% on 10,000 car) 1.2 percent of her income

• Proportional taxes– Takes the same share of all peoples taxes

• No examples

How taxes are Collected

• Direct– Taxes are paid directly to the government

• Indirect– Taxes you pay that are included in the cost of a

good• Landlords put property taxes in there rent

• Pay-as-you-earn– Federal withholdings

Types of Taxes

• Income Taxes– Most states and some cities have income

taxes patterned after the federal system• Federal 15% to 39.6%• States less than 10%

• Sales tax– Taxes added on to the price of goods and

services at the time of purchase• Property taxes

– Taxes on the value of real estate property.

Types of Taxes

• Excise taxes– Taxes on sale of specific goods and services.– Such as tobacco, gasoline, and alcoholic

beverages, firearms, air travel• Estate and Gift Taxes

– Taxes on property which will be received by those legally entitles to the estate.

– Gift taxes are taxes that may be paid by the giver of gifts worth more than 10,000

Types of Taxes

• Business and License Tax– To operate certain kinds of business,

companies, individuals have to have license, permit, or stamp

– These taxes are paid for these certifications• Customs Duties and Tariffs

– To control the flow of products that are imported into this US.

– This sometimes results in items from abroad being sold at higher prices.

Questions

• What is the largest source of federal government revenue?

• Which governments benefit from sales taxes?

• What are the principals of taxation?• What is the difference between sales and

excise taxes?

Tax Cuts

• Lower taxes encourage consumers to make beneficial choices.

• New York eliminated sales taxes on certain products for short periods of time to encourage consumer spending to improve the economy

• Many local governments in areas with high unemployment reduce property taxes for businesses that operate there.

Charities

• If you contribute to a charity, the government may allow you to deduct your contribution from your adjusted gross income.

• This tax break influences many people to give more to charities.

U.S. Government Spending

What State and Local Governments Provide

• Buildings and maintaining local roads• Operating police and fire protection• Maintaining a criminal justice system• Building and staffing public schools• Building and operating state colleges and

university

No Sales Tax States

• Sales taxes in the United States are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon. Hawaii has a similar tax although it is charged to businesses instead of consumers.

No Income Tax States

• Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

Best and Worst States for Taxes

• Even if you live in the most heavily taxed state, Maine (which collects an average of 13.5% of residents' income), you might not be ready to high-tail it to Alaska, the state with the lowest taxes (6.6%, and the only state that lacks both sales and income taxes), unless you have an affinity for mosquitoes and seemingly endless tundra.