Chapter 2

Income, Benefits, and Taxes

Slide 2

What Are the Sources of Earned Income?

2-1 Earned Income and Benefits

• A wage is pay for each hour worked.o Minimum wage – lowest rate by lawo Overtime – 1½ times regular rate

• A salary is pay for each month or year worked.

• A tip is a gift of money for a service.

• A commission is a set fee or percentage of a sale.

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Minimum Wage Laws

2-1 Earned Income and Benefits

Slide 4

What Is Self-Employment?

2-1 Earned Income and Benefits

• Self-employment is working for yourself.

• An entrepreneur is someone who is self-employed and owns a business.

o Lifestyle businesses

o Venture businesses

Owning A Business

Advantages• Make all the

decisions• Work on your own

schedule• Reap all the

rewards and profits

Disadvantages• Carry all the risks• Hard to get up and

running• Huge commitment• Work long hours

and can often not afford to hire help

Types of Small Business

• Lifestyle Business: owner(s) intend to keep the business small.

• Venture Business: Want their business to grow into a large company with unlimited growth and many workers.

How Do I Get Started?

• If your parents own a business, you are much more likely to start a business.

• A good place to start is talking with the advisors at a Small Business Development Center (SBDC)

Slide 8

What Are Employee Benefits?

2-1 Earned Income and Benefits

Benefits are forms of pay other than salary or wages.• Pay without work

• Refers to times

when an employee

who is not work will be paid.• Sick Leave• Personal Leave

Slide 9

What Are Employee Benefits?

2-1 Earned Income and Benefits

• Education: Plans that will pay for, share the cost of, reimburse money spent on education• Perks: Parking space, expense accounts, office with a view, etc.• Insurance/HSAs: Important benefit for many workers

• Price paid for health insurance is called a premium.• Group Life: Life insurance for the employees• Disability: Provides payments to replace income lost

when illness or injury prevents the employee from working.

• Workers Compensation: pays for medical and disability benefits to workers who are injured or contract diseases on the job.

Slide 10

What Are Employee Benefits?

2-1 Earned Income and Benefits

• Retirement plans: an account into which employees contribute portion of their earnings into retirement.

• 401(k)• Profit-sharing plans: Allows employees to share profits of the business

• Bonus• Stock option plans: Allow employees to buy stock at a reduced price. •Health Spending Account (HSA): Allows employees to set aside money (pretax) to pay for qualified medical expenses.

• Often used by employees with high deductible insurance plans

Slide 11

Success Skills

Teamwork• Set clear goals and create a plan.• Define the duties of each team member.• Identify how success will be measured.• Identify problems the team may face.• Have regular meetings.• Build on the strengths of team members.• Recognize accomplishments.

2-1 Earned Income and Benefits

Slide 12

What Is Unearned Income?

2-2 Unearned Income and Benefits

Earned Income Unearned Income Variable Income

Salaries and wages Interest Business profits

Tips Dividends Rents

Commissions Capital gains Royalties

Bonuses Gambling winnings Farm Income

Professional fees Alimony

Social security benefits

Pensions

Annuities

Unemployment compensation

Unearned Income• Money received from sources other than working in a

job• Government Transfer Payments: Money and benefits

received from local, state, or federal governments.– Social Security– Medicare

• In-Cash Payments: money in the form of a check, debit card, or other direct payment given to a person needing assistance.

• In-Kind Payments: Made indirectly on a person’s behalf or paid in a form other than money to those in need.– Food Stamps– Rent Subsidies

Slide 14

What Type of Taxes Do You Pay?

2-2 Unearned Income and Benefits

• Taxes are based on consumption, income, and wealth.

• Direct taxes are paid directly to the government.o Examples: income and property taxes

• Indirect taxes are charged on goods or services bought by the consumer.o Examples: use, excise, and sales taxes

Taxes

• Use Taxes: paid by people who use certain goods or services provided by the government– National Park tax

• Excise Tax: charged on the purchase of specific goods, such as gasoline, tobacco, and alcohol.

• Sales Tax: Added to the purchase price of consumer goods and services

Taxes Based on Income

• Income Tax: to be paid on earned and unearned income.

• Progressive Tax: The more you earn, the more you pay in tax.

Taxes Based On Wealth

• Property Taxes: tax based on the property’s assessed value.

• Business personal property tax: tax on property other than real estate.– Equipment

• Estate Tax: taxes against the estate of a person who has died

• Gift tax: taxes on money given over 13,000 within a tax year.

Slide 18

How Do You Benefit from Paying Taxes?• Direct benefits

o Examples: social security, police, national parks

2-2 Unearned Income and Benefits

• Indirect benefitso Examples: public

education for citizens, free vaccines

Tax the Rich Cartoon

Slide 19

The Critque

Slide 20

Slide 21

Building Communications Skills

2-2 Unearned Income and Benefits

Critical Listening• Evaluate the

information you hear.• Consider only

important or relevant information.

• Make good decisions based on what is accurate and useful.

Slide 22

Focus On . . .

Social Security Benefits

2-2 Unearned Income and Benefits

• Workers pay into the social security fund through payroll deductions.

• A social security number is assigned to each person.

• Employers match the payments.• Upon retirement, workers receive a monthly

benefit check.

Slide 23

What Are Paycheck Deductions?

• A deduction is money withheld from a paycheck.o Required deduction examples: income tax,

social security tax, Medicare taxo Optional deduction examples: health

insurance, savings plan

• Gross pay is total salary or wages.

• Net pay is gross pay minus deductions.

2-3 Taxes and Other Deductions

Deductions

• Exemption: person you claim on your tax return as a dependent– Dependent: person who depends on you for more

than half of his or her support.

• Social Security Tax: Withheld by government, provides a system of old-age, survivors, and disability insurance.

• Medicare Tax: withheld by government to pay for medical care for people 65 and older.

Slide 25

What Tax Forms Must Be Filed?

2-3 Taxes and Other Deductions

• W-2 – reports a worker’s taxable income for the year

• W-4 – how much money to withhold from your paycheck for federal taxes

• 1040EZ – a tax return for filers with no dependents or itemized deductions

• 1040A – a tax return that allows more options for income and deductions

• 1099-INT – reports interest earned

Form W-2

Slide 26

Slide 27

Form W-2

2-3 Taxes and Other Deductions

W-4 Form Explained

Slide 28

W-4 Form

Slide 29

W-4 Cont.

Slide 30

Slide 31

E-Filing

2-3 Taxes and Other Deductions

• It is a fast and safe way to file a tax return.

• You can e-file yourself or hire an authorized e-file provider.

• Those who meet adjusted gross income requirements can e-file free.

• Refunds are often received much quicker.

What Happens to Our Tax Dollars?

Slide 32

The Critique

Slide 33