Copyright 2007 Thomson South-Western

Chapter 2

Income Sources

Slide 2

Types of Earned Income

• Wages– Minimum wage– Overtime pay

• Salaries

• Tips and commissions

2-1 Earned Income and Benefits

Some workers make most of their earnings from tips rather than wages.

Slide 3

Self-Employment

• An entrepreneur takes the risks of being self-employed or owning a business

• Advantages– You can make decisions about how to work or run

the business

– You can keep profits from your work or the business

• Disadvantages– Involves high risk

– Often requires long work hours

2-1 Earned Income and Benefits

Slide 4

Employee Benefits

• Forms of pay other than wages or salary – Pay without work

– Educational reimbursement

– Perks

– Insurance

– Retirement plans

– Profit-sharing and stock option plans

– Health flexible spending arrangements

2-1 Earned Income and Benefits

Slide 5

Success Skills

Networking • Is the process of making contacts and

building relationships with people – Example of contacts include teachers,

counselors, and coworkers– Keep track of contacts’ names, addresses, and

phone numbers

• Helps you stay informed and share information with others

2-1 Earned Income and Benefits

Slide 6

Ethics

Using Sick Leave • Sick leave is a valuable benefit

• Employers have rules regarding use of sick leave

• Ethical behavior requires following the company’s sick leave rules

2-1 Earned Income and Benefits

Slide 7

Unearned Income

• Is money received from sources other than working in a job

• Is taxable

• Comes from private and government sources– Examples from private sources: dividends

and interest

2-2 Unearned Income

Slide 8

Classification of Types of Income

2-2 Unearned Income

Earned Income Unearned Income Variable Income

Salaries and wages Dividends Business profits

Commissions Interest Royalties

Bonuses Capital gains Rents

Professional fees Gambling winnings

Tips Alimony

Social Security benefits

Pensions

AnnuitiesSource: Internal Revenue Service, http://www.irs.gov/businesses/small/international/article/0,,id=96811,00.html (accessed March 6, 2006).

Slide 9

Government Transfer Payments

• Money and benefits received from local, state, or federal governments

• In-kind transfer payments– Examples: food stamps, rent subsidies, and

Medicaid services

• In-cash transfer payments– Examples: checks, debit cards, or other direct

payments

2-2 Unearned Income

Slide 10

Taxes

• Are required payments to a government

• Are collected from many sources – Examples: income taxes, use taxes, and

excise taxes

• Are paid on earned and unearned income

2-2 Unearned Income

Slide 11

Costs of Paying Taxes

• Paying taxes reduces disposable income

• Less money is left to spend or save• Lower spending may affect the economy

2-2 Unearned Income

Slide 12

Benefits of Paying Taxes

• Taxes benefit taxpayers– Example: Social Security tax provides retirement

benefits to workers

• Taxes benefit all residents– Examples: Highways, parks, government transfer

payments

2-2 Unearned Income

Taxes help provide parks for everyone to enjoy.

Slide 13

Building Communications Skills

Critical Listening • Involves evaluating the information you hear • Unneeded or conflicting information is

ignored • Can be improved with practice• Helps you make good decisions based on

accurate and useful information

2-2 Unearned Income

Slide 14

Focus on...

Social Security Benefits • Workers pay into the Social Security

fund and receive a statement each year

• Payments are matched by employers

• The worker receives monthly benefit checks when retired

2-2 Unearned Income

Slide 15

Taxes and Disposable Income

• Wages, salaries, and business profits are taxable

• Some unearned income is taxable

• Lower taxes result in higher disposable income

• Higher taxes result in lower disposable income

2-3 Taxes and Other Deductions

Slide 16

Required Deductions

• Money withheld from a worker’s paycheck– Examples: income tax, Social Security tax, and

Medicare tax

• Gross pay minus taxes and other deductions equals net pay

2-3 Taxes and Other Deductions

Slide 17

Sample Paycheck Stub

2-3 Taxes and Other Deductions

Slide 18

Income Taxes

• Are withheld according to income amount and exemptions claimed on Form W-4

2-3 Taxes and Other Deductions

Slide 19

Social Security Tax

• Is withheld by the federal government

• Provides a system of old-age, survivors, and disability insurance

• Requires employers to verify that workers are eligible for employment

• Requires workers to complete parts of Form I-9, Employment Eligibility Verification

2-3 Taxes and Other Deductions

Slide 20

Medicare Tax

• Is withheld by the federal government

• Pays for medical care for retired persons and those who receive Social Security benefits

• Is paid by workers and employers

2-3 Taxes and Other Deductions

Slide 21

Workers’ Compensation

• An insurance plan

• Pays medical and disability benefits to workers who are injured orcontract diseases on the job

• Laws and programs vary bystate

• Premiums are paid primarilyby employers

2-3 Taxes and Other Deductions

Slide 22

Optional Deductions

• Payments for items other than taxes that are subtracted from a worker’s pay – Examples: health insurance, vision

insurance, savings plan,and retirement plan

2-3 Taxes and Other Deductions

Retirement plans allow many retired workers to live comfortably.

Slide 23

Federal Tax Filing

• Whether U.S. citizens must file a federal income tax return depends upon– Gross income– Filing status– Age– Whether you are a dependent

2-3 Taxes and Other Deductions

Slide 24

Tax Forms

2-3 Taxes and Other Deductions

Form W-2 Used to report the taxable income a worker received during the calendar year

Form 1040EZ Designed for use in filing income taxes by single and joint filers with no dependents

Form 1040A A two-page form designed for use in filing income taxes Allows more options for income and deductions to be entered

Form 1099-INT Shows the interest income earned during the year at one bank

Slide 25

Focus on...

Workplace Safety • Benefits both workers and the company

• Begins with good work attitudes

• Is part of everyone’s job

• Includes effective emergency plans

2-3 Taxes and Other Deductions

Slide 26

Technology Corner

E-Filing • Is a way to file a federal tax return electronically • Provides income tax returns more quickly

1-2 Career Planning

Source: United States Department of the Treasury, Internal Revenue Service, http://www.irs.gov/efile/index.html (accessed October 16, 2006).

You can learn more about e-filing at the IRS Web site.