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Net IncomeChapter 2.1 Federal Income Tax
Objectives:β’ Determine the amount of tax withheld for federal income tax.
Those who have received paychecks before have noticed that the check did not total what the gross income should have been.
In this chapter we will discuss and calculate the deductions and withholdings that can occur from a paycheck.
In order for the federal government to pay for services, a federal income tax (FIT) is withheld from your paycheck.
The Internal Revenue Service (IRS) provides employers the tables necessary to determine the amount to withhold from employees paychecks.
The amount withheld depends on your amount of income as well as your marital status, and withholding allowances.
You may claim one allowance for yourself, one for your spouse, and one for each dependent you support.
Net IncomeChapter 2.1 Federal Income Tax
Objectives:β’ Determine the amount of tax withheld for federal income tax.
One method for calculating federal income tax withheld is using the table Married Persons Weekly Payroll.
Dan Caine is a welder, is married and claims 1 allowance. His weekly income is $390.50. What is the federal income tax withheld?
Step 1: Find the income range from the table.
Step 2: Find the column for 2 allowances.
Step 3: Cross intersect to find the amount of federal income tax withheld.
The amount withheld is $18.00.
Percentage Method. Some companies use a percentage method to compute income tax withheld. Percentage method uses taxable wages to determine the withholding amount. Taxable wage depends on the number of allowances you claim and the weekly allowance rate.
Net IncomeChapter 2.1 Federal Income Tax
Objectives:β’ Determine the amount of tax withheld for federal income tax.
π΄ππππ€ππππ π΄πππ’ππ‘ = ππ’ππππ ππ π΄ππππ€πππππ β ππππππ¦ π ππ‘π
πππ₯ππππ ππππ = πΊπππ π πππ¦ β π΄ππππ€ππππ π΄πππ’ππ‘
π΄πππ’ππ‘ π€ππ‘ββπππ πππ πΉπΌπ = πππ₯ππππ π€πππ πππ π π‘ππππ
Percentage Method of Withholding β Single Person
Each Weekly Allowance = 63.46
Weekly Taxable Wage Amount of income tax to withhold:
Over But not over
$51.00 $195.00 $0.00 plus 10% of excess over $51.00
195.00 645.00 14.40 plus 15% of the excess over 195.00
645.00 1,482.00 81.90 plus 25% of excess over 645.00
Net IncomeChapter 2.1 Federal Income Tax
Objectives:β’ Determine the amount of tax withheld for federal income tax.
Lance Hartβs gross pay fro this week is $393.23. He is a carpenterβs apprentice, is single, and claims 2 allowances. Using the percentage method, what amount will Lanceβs employer withhold for federal income tax?
Step 1: π΄ππππ€ππππ π΄πππ’ππ‘ = ππ’ππππ ππ π΄ππππ€πππππ β $63.46
Step 2: πππ₯ππππ ππππ = πΊπππ π πππ¦ β π΄ππππ€ππππ π΄πππ’ππ‘
$126.92 = 2 β $63.46
$266.31 = 393.23 β 126.92
Step 3: πππ₯ πππ‘ββπππ πππ πΉπΌπ = $14.40 + [ 15% β $266.31 β 195 ]
$25.10
What happens if your employer does not withhold enough?
What happens if your employer withholds too much?
Net IncomeChapter 2.2 State Income Tax
Objectives:β’ Determine the amount of tax withheld for state income tax (SIT).
Like federal income tax, most states have a state tax. Florida and Texas do not have a state tax; however, the βotherβ taxes can be large to pay for the state provided services.
Some states express the state tax as a percentage using exemptions. Exemptions are very much like federal withholding allowances.
πππ₯ππππ πππππ = π΄πππ’ππ πΊπππ π πππ¦ β πΈπ₯ππππ‘ππππ
ππ‘ππ‘π πΌπππππ πππ₯ = πππ₯ππππ πππππ β πππ₯ π ππ‘π
Tony Raymondβs gross pay is $44,750 a year. The state income tax rate is 3% of taxable wage. He takes one exemption for himself and one exemption for his child. How much does Tonyβs employer withhold from his gross earnings for state income tax.
Exemptions
Single $2,000
Married 4,000
Each Dependent 2,000
$44,750 β 2000 + 2000 = $40,750 $40,750 β 3% = $1,222.50
Net IncomeChapter 2.2 State Income Tax
Objectives:β’ Determine the amount of tax withheld for state income tax (SIT).
πππ₯ππππ πππππ = π΄πππ’ππ πΊπππ π πππ¦ β πΈπ₯ππππ‘ππππ
ππ‘ππ‘π πΌπππππ πππ₯ = πππ₯ππππ πππππ β πππ₯ π ππ‘π
Andrea McReedy earns $52,600 per year. She is married and pays $2,430 in state income tax per year. She claims no other dependents. What is the state income tax rate for her state?
πππ₯ππππ πππππ = $52,600 β $4,000 = $48,600
$2,430 = $48,600 β π‘ππ₯ πππ‘π
πππ₯ π ππ‘π =$2,430
$48,600= 0.05 ππ 5%
Net IncomeChapter 2.3 Graduated State Income Tax
Objectives:β’ Determine the amount of state tax withheld from a graduated scale.
Some states use a graduated income tax. This means that the more you earn the more tax you will pay.
This is exactly like graduated commission.
We need to introduce a new equation to aid us in determining the amount of taxes being withheld per paycheck.
πππ₯ πππ‘ββπππ πππ πππ¦ ππππππ =π΄πππ’ππ πππ₯ πππ‘ββπππ
ππ’ππππ ππ πππ¦ πππππππ πππ π¦πππ
Net IncomeChapter 2.3 Graduated State Income Tax
Objectives:β’ Determine the amount of state tax withheld from a graduated scale.
Louise Mainβs annual salary is $34,500. She receives her pay semimonthly. Her exemptions total $2,000. Determine how much her employer deducts for state income tax per paycheck.
State Tax
Taxable Wages
Tax Rate
First $1,000 1.5%
Next $2,000
3.0
Next $2,000
4.5
Over $5,000
5.0%
Exemptions
Single $2,000
Married 4,000
Each Dependent
2,000
πππ₯ππππ πππππ = $34,500 β $2,000 = $32,500
πΉπππ π‘ $1,000: $1,000 β 1.5% = $15.00
πππ₯π‘ $2,000:$2,000 β 3.0% = $60.00
πππ₯π‘ $2,000:$2,000 β 4.5% = $90.00
ππ£ππ $5,000: 32,500 β 5000 β 5.0% = $1,375.00
πππ‘ππ πππ₯ππ = $1,540.00
πππ₯ πππ‘ββπππ πππ πππ¦ ππππππ =π΄πππ’ππ πππ₯ πππ‘ββπππ
ππ’ππππ ππ πππ¦ πππππππ πππ ππππ=$1,540
24= $64.17
Net IncomeChapter 2.4 Social Security and Medicare Taxes
Objectives:β’ Calculate the amount withheld for Social Security and Medicare taxes.
The Federal Insurance Contributions Act (FICA) requires employers to deduct a percent of your income as taxes for Social Security and Medicare.
Social Security pays for retirement and disability benefits; while Medicare provides medical insurance. These benefits are for those who are 65 years and older.
Social Security tax rate is 6.2% and is paid on the first $97,500 of income. The Medicare tax rate is 1.45% with no limit on your earnings.
πππ₯ πππ‘ββπππ = πΊπππ π πππ¦ β πππ₯ π ππ‘π
Riley Hendersonβs gross biweekly pay is $728. His earnings to date for the year total $26,208. What amount does his employer deduct from his pay this period for Social Security taxes and Medicare taxes?
πΊπππ π πππ¦ β ππππππ ππππ’πππ‘π¦ π‘ππ₯ πππ‘π = $728.00 β 6.2% = $45.14
πΊπππ π πππ¦ β ππππππππ π‘ππ₯ πππ‘π = $728.00 β 1.45% = $10.56
πππ‘ππ π·πππ’ππ‘πππ = $45.14 + $10.56 = $55.70
Net IncomeChapter 2.5 Group Health Insurance
Objectives:β’ Calculate the deduction for group health insurance.
Many businesses offer to pay for health insurance because group insurance rates are cheaper than individual rates.
Most companies will often pay part of the insurance costs, or premium, while the employee pays for the remaining percentage.
πΈπππππ¦ππβ²π πβπππ = π΄πππ’ππ π΄πππ’ππ‘ β πΈπππππ¦ππβ²π πππππππ‘
The employeeβs amount is then deducted each pay period.
π·πππ’ππ‘πππ πππ πππ¦ ππππππ =πππ‘ππ π΄πππ’ππ π΄πππ’ππ‘ ππππ ππ¦ πΈπππππ¦ππ
ππ’ππππ ππ πππ¦ πππππππ πππ ππππ
Nadine McClure has family medical coverage through her company. The annual cost is $9,800. The company pays 75% of the cost. How much does she have deducted from her biweekly paycheck?
100% - 75% = 25% employee pays $9,800 β 25% = $2,450 π‘ππ‘ππ ππππππ¦ππ πππ¦π
$2,450 Γ· 26 πππ¦ πππππππ = $94.23 ππππ’ππ‘ππ πππ πππ¦ ππππππ
Net IncomeChapter 2.5 Group Health Insurance
Objectives:β’ Calculate the deduction for group health insurance.
Kim Choi pays $115.80 per month for group medical insurance. Her employer pays 55% of the cost. How much is the annual premium.
100%β 55% = 45% πΎππ πππ¦π
πΈπππππ¦ππβ²π πππππππ‘ β π΄πππ’ππ ππππππ’π
ππ’ππππ πππππ¦ πππππππ πππ π¦πππ= π·πππ’ππ‘πππ πππ πππ¦ ππππππ
0.45 β π₯
12= $115.80
πΎππβ²π πππ’ππ ππππππ’π = $3,088.00
Net IncomeChapter 2.6 Statement of Earnings
Objectives:β’ Calculate the net pay per pay period.
As we have discussed, there are deductions from our paychecks for federal and state taxes, insurance, Social Security, and Medicare. Other deductions may occur for union dues, community contributions, savings and/or retirement plans.
Attached with your pay stub is an itemized list of all your deductions called a statement of earnings. The statement of earnings shows your gross pay, all your deductions and a bottom-line figure which is your net pay.
Net Pay is the amount of money you have left after all withholdings and deductions are subtracted from your gross pay. Tis is sometimes called your net income or your take-home pay.
πππ‘ πππ¦ = πΊπππ π πππ¦ β πππ‘ππ π·πππ’ππ‘ππππ
