CHAPTER 2: INCOME, BENEFITS AND TAXES. 2-1 EARNED INCOME AND BENEFITS Complete the following vocabulary terms: Minimum Wage: Overtime Pay: Commission:

CHAPTER 2:

INCOME, BENEFITS AND TAXES

Sources of Income

A. Wages: Hourly wages = paid for every hour worked

a. Minimum Wage = ___________ in 2010

b. States can set a wage _________than the federal rate.

c. An _____ hour day and ______ hour work week is standard.

$7.25

higher

8 40

c. Overtime Pay: is_____ times the regular rate.

Example: What is the overtime pay rate if you are paid $10.00 an hour?

10.00 * 1.5 = $15.00

1 ½

I. Sources of Income (Continue)

B. Salary is a set amount paid annually.

1. Do not keep time cards.

2. More flexibility in work hour

3. Work more than 40 hours a week


C. Tips: A gift to a person performing a service (usually a percentage.)

a. Based on quality of service

b. Employers withhold taxes based on tips.

c. Minimum wage for tipped employee = ____ as long as with tip employee is making ________ or more on average.

$2.13/hr

$7.25


D. Commission: a set fee or a percentage of a sale paid to an employee.

GROSS PAY REINFORCEMENT

How much must an employer pay an hourly employee for hours worked beyond a regular work week?

1 ½ times their regular pay per hour.

Formula for calculating Pay

Gross Pay =

Regular Hours Worked X Regular Pay

+ Overtime Hours Worked X Overtime Rate


Compute gross pay for these situations:

Regular hours worked: 40

Overtime hours worked: 5

Regular rate of pay: $5.85 an hour

Regular Pay = 40 X 5.85 = $234.00

.

Gross Pay = 234.00+ 43.90 = $277.90.

Overtime Pay Rate = $5.85 x 1.5 = $8.78

Overtime Pay = 5 hrs x $8.78 = $43.90



Total hours worked: 43 hours ( in 5 days)

Regular rate of pay: $6.10

Regular Pay = 40 X 6.10 = $244.00

.Gross Pay = 244.00+ 27.45 = $271.45

Overtime Pay Rate = $6.10 x 1.5 = $9.15Overtime Pay = 3 hrs x $9.15 = $27.45



Annual Salary: $18,000.00

Compute monthly gross pay

Monthly Gross Pay = 18,000/12 = $1,500.00

.

II What is Self-Employment

A. Entrepreneur

B. Advantages of Owning Your Own Businessa. Owner makes all the decisions

b. Owners keep the profitsa. _____________ amount left after all expenses are

deducted from the revenues/sales of the business.Profit

http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/thinking-about-starting



II What is Self-Employment

C. Disadvantages of Owning Your Own Business

a. Possibility of losing all the money put into the business. _

b. Risky, hard to get credit.

c. Long hours.

d. Responsible for all tasks.

Types of Small Businesses

Two main types:

1. Lifestyle Business:

2. Venture Business:

The owner keeps the business small and the business exists for the lifetime of the owner.

The owner wants the business to grown into a large company with unlimited growth.

What are Employee Benefits

Employers provide benefits to full time employees.

Employee may have to pay some of the cost for health insurance

Cafeteria Plan: a benefit plan that allows workers to choose from a number of options.

Employee Benefits (cont)

Benefits ______________ the overall value a worker receives.

Benefits can directly increase an employees

________________________

increase

Disposable Income

Types of Benefits

a. Pay without work1. Paid Holidays

2. Sick Leave

3. Personal Leave

b. Educational Benefits

c. Perks

Types of Benefits (cont.)

d. Insurance1. Health Insurance

2. Group Life Insurance

3. Disability Insurance

4. Workers Compensation

e. Retirement Plansa. 401 K’s

b. Pension Plan

HEALTH SPENDING ACCOUNT

Health Flexible Spending account Health Savings Account

Complete the Following

1. John works 45 hours this week.. His hourly rate is $12.75. What is John’s gross pay?

Regular Pay = Regular Pay Rate x Regular Hours =

Regular Pay

= $12.75 X 40 hours = $510.00

Overtime Rate = Regular Pay Rate X 1.5 = Overtime

Rate

= $12.75 X 1.5 = $19.13

Overtime Pay = Overtime Pay Rate X Overtime Hours =

Overtime Pay

= $19.13 X 5 = $95.65

Gross Pay = Regular Pay + Overtime Pay = Gross Pay

= $510.00 + $95.65 = $605.65

UNEARNED INCOME AND PAYMENTS

What is Unearned Income?

A. Private Sources:1. Interest earned on

a. Savings Accounts

b. Certificate of Deposits (CD)

c. U.S. Savings Bonds

2. Dividends earned on a corporation’s profits distributed

1. Cash Dividends payment of a percentage of profits made to stockholders

2. Stock Dividends payment is made in the form of shares of stock.

Unearned Income (cont.)

3. Pension Payments

4. Winnings/Prizes from the Lottery 5. Variable Income: Money received from

some type of activity other than working.

a. Royalties

b. Rent


B. Government Transfer Paymentsa. Types:

1. Temporary assistance for needy families

2. Medicaid

3. Veterans Benefits

4. Social Security

5. Unemployment Compensation

SAFETY NET


C. In-Cash Payments

1. Examples: Debit cards in a specified amount.

D. In-Kind Payments

Examples: Food Stamps, Rent subsidies, vouchers.

What Types of Taxes Do You Pay?

A. Taxes based on consumptiona. _USE TAX – paid for goods and services provided by

the government___1. Examples:

b. Excise Tax – charged on the purchase of specific goods

1. Examples: Gasoline, cigarettes, and alcoholic beverages.

c. Sales Tax – added to the purchase price of consumer goods and services.

Known as a Regressive Tax – takes a larger % from low income.

Tolls, Parks, and Gasoline


B. Taxes based on Incomea. Income taxes paid on earned and unearned income

b. Known as a Progressive Tax- the more you earn, the more you pay


B. Taxes based on Wealtha. Property Tax: paid on real estate

a. Assessed value may not be the same as the Market Value.

a. Market Value – highest price the property would sell.

b. Business Personal Property Tax is levied against property other than real estate.

b. Federal Estate Tax

c. Gift Tax

How do you benefit from Paying Taxes

A. Paying taxes _________ disposable income

B. BENEFITS1. Direct Benefits: benefits those paying taxes and other who

may not

a. Example: Social Security

b. Provide overall benefits

1. Public Good: Goods and services provided by gov’t.a. Example: National Defense, Public Education.

b. 3 Unique Qualities

a. Everyone benefits

b. No one can be excluded

c. Those who benefit the most often pay the less.

Taxes and Other Deductions

What are Paycheck Deductions

A. Employees are required to have $ withheld from your paycheck.

Gross Pay = Total Pay

Net Pay = Gross Pay – All Deductions

Required Deductions

1. Income Tax Withholding = Federal and State.

1. Amount withheld based on your W-4

2. IRS provides details on how a person qualifies as a Dependent

3. Minor children are claimed as dependents on their parents’ tax return.

.

Turn to Page 62 – Figure 2-3.1

Total Amount Withheld = $597.48 + 672.00 = $1.850.52

Percentage of gross pay taxes represent = 597.48/3120.00 = .19

W-4 Form

Required Deductions

2. Social security Tax: 2010 Social Security Tax = 6.2%

Self-Employed Social Security Tax = 12. 4%

Why is the Self-Employed rate higher than the Employee rate?

The self employed pays both the employer’s and employee’s portion

Form 1-9

Employment Eligibility Verification Form

i. Form shows if employee is a U.S. citizen

ii. Documents used to verify

1. U.S. Citizenship

2. Lawful permanent resident

3. Alien authorize to work in the U.S

Medicare Tax

Medicare Tax = 1.45%

Self-employed Medicare tax = 2.9%

FICA = Federal Insurance Contribution Act Tax combines Social Security and Medicare Taxes

Workers Compensation Insurance

Pays medical and disability benefits to employees injured or contract disease on the job.

W-2 Form

Will receive from each company you worked for during one year.

A summary for the income you earned that year and all amounts the employer withheld for taxes.

Federal, State, and local taxes.

What are the taxes affect on gross pay?

If an employee earns $1,000.00

What is the Net Pay

Payroll Tax Rates

Social Security Tax Rate

Medicare Tax

Rate

Total Payroll Taxes

6.2%

1.45%

7.6%

$62.00

$14.50

$76.50

Gross Pay – Taxes – All other deductions =

Net Pay

1,000.00 – 76.50 = 923.50

Calculate the following Net Pay

Social Security = 6.2%

Medicare = 1.45%

Federal Income Tax = $216.00

State Income Tax = $45.73

State Unemployment Insurance = .42%

Life Insurance $20.00 per pay

Savings Plan $100 per pay

In the following scenario determine the net pay if Matt gets paid every two weeks. Matt receives 48,500.00 annual salary

How to get started

1. What is Matt’s gross pay amount every two weeks?

($48.500/52) * 2 = $1,865.38

Matt’s gross pay ever 2 weeks = $1,865.38

How to get started – Matt’s Deductions.

Social Security =

Medicare =

Federal Income Tax = $216

State Income Tax = $45.73

State Unemployment Insurance =

Life Insurance = $20.00

Savings Plan = $100.

$1865.39 * .062 = $115.65

$1865.39 * .0145= $27.05

$1865.38 * .0042 = $7.83

NET PAY = GROSS PAY TAXES DEDUCTIONS

Annual1865.39 Social Security $115.65 Life Insurance $20

Medicare Tax $27.05 Savings Plan $100

Fed. Inc Tax

$216.00

State Inc Tax $45.75

State Unempl. $7.83

$412.28$120

$1865.39-412.28-120.00 NET PAY = $1333.11

SCENARIO

In this simulation, you will take on the role of Matthew Jones in order to reinforce how to complete Form W-4.

You are not married. You have no children. No one else depends on you for income or support.

In May, you graduated from college with a degree in marketing. .

1 1

00

0

03

Matthew Jones

5022 Oak Tree Drive. ANYTOWN, US 00001

x

3

1

Calculating Your Exemptions

W-4 – you can take less exemptions.

Fewer Exemptions = Greater Tax taken out

More Exemptions = Less Tax Taken Out

How do you know?

Assignment

Go to my web site – Under the Links for Chapter 2– Select – Taxes

Click on W-4 Calculator

Which of the following Exemptions would you pick and why?

0 Exemptions,

1 Exemption

Or 2 Exemptions

http://www.wsu.edu/payroll/cgi-bin/withhold2012.cgi

1 1

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0

03

Matthew Jones

5022 Oak Tree Drive. ANYTOWN, US 00001

x

1

123-45-6789

Matthew Jones

123-45-6789

11-123456 $48,500 $5,616.00

$51,100.00 $3,007.00

$ 51,100.00 $703.25ABC Bank5 Fox Run RoadDeptford, NJ 08012

Matthew Jones987 Maple StreetDeptford, NJ 08012

D $2,600.00

X

NJ 12345 $ 48,500.00 $1189.00 $51,100.00 Dept

FORM 1040EZ

Use Matt’s W-2 form to fill out the 1040EZ Tax form. – Other needed information

Matt is single and can not be claimed as a dependent on anyone else’s tax return.

Matt earned $900.00 in interest Matt does not want to give any money to the

Presidential election fund. Matt works as a Bank Manager

Sample Tax Return