Part 6Managing Your Income Chapter 23 Understanding Income and Taxes

Part 6—Managing Your Part 6—Managing Your IncomeIncome

Chapter 23Chapter 23

Understanding Understanding Income and TaxesIncome and Taxes

Chapter ObjectivesChapter Objectives

DescribeDescribe the different forms of income the different forms of income and fringe benefits an employee can and fringe benefits an employee can receive for doing a job.receive for doing a job.

DistinguishDistinguish betweenbetween gross pay and net gross pay and net pay.pay.

DescribeDescribe paycheck deductions. paycheck deductions. IdentifyIdentify the various services and facilities the various services and facilities

provided by tax dollars.provided by tax dollars. DescribeDescribe how consumers are taxed and how consumers are taxed and

the types of taxes they pay.the types of taxes they pay.continued

Chapter ObjectivesChapter Objectives

SimulateSimulate filing a federal income tax filing a federal income tax return.return.

DescribeDescribe the purpose of, and benefits the purpose of, and benefits provided by, the Social Security program, provided by, the Social Security program, Medicaid, Medicare, workers’ Medicaid, Medicare, workers’ compensation, and unemployment compensation, and unemployment insurance. insurance.

Key ConceptsKey Concepts

Earned income can include wages, Earned income can include wages, salaries, commissions, piecework, tips, salaries, commissions, piecework, tips, bonuses, and fringe benefits.bonuses, and fringe benefits.

Paycheck deductions include social Paycheck deductions include social security and federal income taxes, and security and federal income taxes, and may include state income taxes, union may include state income taxes, union dues, and insurance premiums.dues, and insurance premiums.

The taxes you will be paying include The taxes you will be paying include personal income tax, social security tax, personal income tax, social security tax, property tax, sales tax, and excise tax.property tax, sales tax, and excise tax.

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Key ConceptsKey Concepts

Social security provides income when Social security provides income when earnings are reduced or stopped because earnings are reduced or stopped because of retirement, disability, or death.of retirement, disability, or death.

Worker’s compensation provides Worker’s compensation provides payments to workers when they are payments to workers when they are injured on the job.injured on the job.

Unemployment insurance provides Unemployment insurance provides benefits to workers who have lost their benefits to workers who have lost their jobs.jobs.

Forms of IncomeForms of Income

Earned income: Earned income: The money you are paid for The money you are paid for doing a job.doing a job.

The form of income you receive depends on The form of income you receive depends on the type of job you have.the type of job you have.

If you are a real estate agent, you are If you are a real estate agent, you are probably paid a commission.probably paid a commission.

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Forms of IncomeForms of Income

Common forms of income:Common forms of income: Wages.Wages. Salary.Salary. Commission.Commission. Piecework.Piecework. Tips.Tips. Bonus.Bonus. Profit sharing.Profit sharing. Fringe benefits.Fringe benefits.

WagesWages

Wage:Wage: A set amount of pay for every hour A set amount of pay for every hour of work.of work.

Hourly wages vary depending on the type Hourly wages vary depending on the type of job and the employee’s experience and of job and the employee’s experience and skills.skills.

Minimum wage is the lowest amount an Minimum wage is the lowest amount an employer can legally pay a worker per employer can legally pay a worker per hour.hour.

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WagesWages

Workers are paid Workers are paid overtime if they overtime if they work more than 40 work more than 40 hours per week.hours per week.

Overtime pay is Overtime pay is usually one-and-a-usually one-and-a-half times a half times a workers regular workers regular wage.wage.

SalarySalary

Salary: Salary: A set amount of money paid for a A set amount of money paid for a certain period of time.certain period of time.

Workers with more skills and experience Workers with more skills and experience usually earn salaries.usually earn salaries.

Salaried workers are less likely to receive Salaried workers are less likely to receive overtime pay.overtime pay.

CommissionCommission

Sometimes workers Sometimes workers in sales earn in sales earn commission, orcommission, or a a percentage of their percentage of their sales.sales.

Commission is an Commission is an incentive for workers incentive for workers to sell more.to sell more.

The more a person The more a person sells, the more sells, the more money they make.money they make.

PieceworkPiecework

Piecework:Piecework: An employee receives a set An employee receives a set amount for each piece of work they do.amount for each piece of work they do.

Piecework can serve as an incentive for Piecework can serve as an incentive for higher production.higher production.

Pay for piecework has to be equal to or Pay for piecework has to be equal to or higher than minimum wage.higher than minimum wage.

TipsTips

Tips: Tips: Small amounts of Small amounts of money given by money given by customers to service-customers to service-related workers in related workers in return for service.return for service.

Tipping is a way for Tipping is a way for customers to reward customers to reward workers for good workers for good service.service.

Tips are part of income Tips are part of income and subject to income and subject to income tax regulations.tax regulations.

BonusBonus

Bonus:Bonus: An extra payment in addition to the An extra payment in addition to the worker’s regular pay.worker’s regular pay.

An incentive bonus encourages workers to An incentive bonus encourages workers to produce more.produce more.

A year-end bonus may be used to A year-end bonus may be used to encourage workers to stay with a encourage workers to stay with a company.company.

Profit SharingProfit Sharing

Profit sharing:Profit sharing: Company stock or bonuses Company stock or bonuses used to reward employee’s hard work and used to reward employee’s hard work and encourage greater productivity.encourage greater productivity.

An employee’s share may be based on An employee’s share may be based on seniority, productivity, evaluations, or seniority, productivity, evaluations, or other criteria.other criteria.

Fringe BenefitsFringe Benefits

Fringe benefits are extra financial rewards Fringe benefits are extra financial rewards in addition to income.in addition to income.

Fringe benefits may include:Fringe benefits may include: Paid vacation time.Paid vacation time. Paid holidays.Paid holidays. Paid sick leave.Paid sick leave. Paid health and life insurance.Paid health and life insurance. Company child care facilities.Company child care facilities. Tuition aid.Tuition aid.

Fringe benefits are a major consideration Fringe benefits are a major consideration in choosing a job.in choosing a job.

Understanding Your Understanding Your PaycheckPaycheck

Deductions: Deductions: Amounts of money subtracted from Amounts of money subtracted from your paycheck for tax payments and other your paycheck for tax payments and other expenses.expenses.

Gross pay:Gross pay: The total amount earned for a pay period The total amount earned for a pay period before deductions are subtracted.before deductions are subtracted.

Net pay: Net pay: Gross pay minus deductions.Gross pay minus deductions.

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Social security tax and federal income tax are Social security tax and federal income tax are two deductions your employer makes.two deductions your employer makes. Social security tax is a set percentage of your Social security tax is a set percentage of your

income.income. Federal income tax depends on how much money Federal income tax depends on how much money

you make and the number of exemptions you are you make and the number of exemptions you are allowed.allowed.

Exemption:Exemption: A set amount of money on which A set amount of money on which you do not have to pay tax.you do not have to pay tax.

Form W-4:Form W-4: The Employer’s Withholding The Employer’s Withholding Allowance Certificate, which gives your Allowance Certificate, which gives your employer information needed to determine how employer information needed to determine how much tax to withhold from your paycheck.much tax to withhold from your paycheck. continue

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Each exemption you claim makes the Each exemption you claim makes the amount deducted from your paycheck amount deducted from your paycheck lower.lower.

FICA:FICA: The Federal insurance Contributions The Federal insurance Contributions Act, which began the social security tax.Act, which began the social security tax.

TaxesTaxes

Because we pay Because we pay taxes and social taxes and social security, the security, the government is able government is able to provide certain to provide certain services and services and benefits.benefits.

Citizens are required Citizens are required to pay taxes to city, to pay taxes to city, county, state, and county, state, and federal governments.federal governments.

Types of TaxesTypes of Taxes

Personal income tax – tax on the amount Personal income tax – tax on the amount of money you earn.of money you earn.

Social security tax – tax on your income; Social security tax – tax on your income; used to pay for the social security used to pay for the social security program.program.

Property tax – tax on the value of property Property tax – tax on the value of property or real estate you own.or real estate you own.

Sales tax – tax on goods and services.Sales tax – tax on goods and services. Excise tax – tax placed on certain goods Excise tax – tax placed on certain goods

and services (gasoline, cigarettes, liquor, and services (gasoline, cigarettes, liquor, and telephone service).and telephone service). continue

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Types of TaxesTypes of Taxes

Some types of taxes may fit in more than Some types of taxes may fit in more than one classification:one classification: Direct taxes – charged directly to the taxpayer.Direct taxes – charged directly to the taxpayer. Indirect taxes – included in the price of taxed Indirect taxes – included in the price of taxed

items.items. Progressive taxes – take a greater share of Progressive taxes – take a greater share of

income from the rich than the poor.income from the rich than the poor. Regressive taxes – take a lower percentage of Regressive taxes – take a lower percentage of

income from the rich and a higher percentage income from the rich and a higher percentage from the poor.from the poor.

Preparing Tax ReturnsPreparing Tax Returns

Tax returns must be filed yearly declaring Tax returns must be filed yearly declaring how much income you made and how much how much income you made and how much federal tax you owe.federal tax you owe.

If your state taxes income, you will have to If your state taxes income, you will have to file a state tax return. However, everyone who file a state tax return. However, everyone who earns money must file a federal tax return.earns money must file a federal tax return.continue

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You will receive a refund if too much tax was You will receive a refund if too much tax was withheld, but if too little was withheld you withheld, but if too little was withheld you have to pay the amount owed.have to pay the amount owed.

Form W-2:Form W-2: The Wage and Tax Statement that The Wage and Tax Statement that shows the amount you were paid the year shows the amount you were paid the year before.before.

Your Form W-2 will help you prepare your Your Form W-2 will help you prepare your federal income tax return.federal income tax return.

On your tax return you must list:On your tax return you must list: All income made from wages, salaries, tips, and All income made from wages, salaries, tips, and

bonuses.bonuses. Money made from savings accounts, stocks, Money made from savings accounts, stocks,

bonds, and other financial investments.bonds, and other financial investments. continued


Forms 1040EZ and 1040A:Forms 1040EZ and 1040A:Short forms.Short forms.Easiest and quickest to file.Easiest and quickest to file.Used by taxpayers whose Used by taxpayers whose

income is in a certain range income is in a certain range and who do not choose to and who do not choose to itemize deductions.itemize deductions.

Form 1040:Form 1040:Long form.Long form.Requires more time and Requires more time and

information; usually have to information; usually have to file extra tax forms with it.file extra tax forms with it.

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When preparing your federal When preparing your federal tax return, you should:tax return, you should: Get all your financial records Get all your financial records

together.together. Read instructions before you Read instructions before you

begin.begin. Prepare forms in pencil first.Prepare forms in pencil first. Make copies of finished forms Make copies of finished forms

for your records.for your records. April 15April 15thth is the final date for is the final date for

filing; you may have to pay filing; you may have to pay penalties or interest fees if penalties or interest fees if you file late.you file late.

Filing Your First Tax ReturnFiling Your First Tax Return

To fill out Form 1040EZ:To fill out Form 1040EZ: Determine your filing status.Determine your filing status. Report your income.Report your income. Identify payments and taxes.Identify payments and taxes. Determine the refund or amount owed.Determine the refund or amount owed. Sign the return.Sign the return. Attach a copy of Form W-2.Attach a copy of Form W-2. Mail form to the Internal Revenue Service Mail form to the Internal Revenue Service

Center.Center.

Social SecuritySocial Security

Social security is the government program Social security is the government program that provides income when family wages that provides income when family wages are lessened or stopped due to retirement, are lessened or stopped due to retirement, disability, or death.disability, or death.

It is not intended to replace the earnings It is not intended to replace the earnings you formerly received. It is a basic level of you formerly received. It is a basic level of income for you to build on.income for you to build on.

Social Security BenefitsSocial Security Benefits

Employers and employees both pay social Employers and employees both pay social security taxes.security taxes.

Social security taxes deducted from your Social security taxes deducted from your paycheck pay for other people’s benefits.paycheck pay for other people’s benefits.

When you receive social security benefits, When you receive social security benefits, they will be paid for by the taxes of other they will be paid for by the taxes of other people.people.

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Types of social Types of social security benefits security benefits include:include: Retirement Retirement

benefits.benefits. Disability benefits.Disability benefits. Survivors’ Survivors’

benefits.benefits. Medicare benefits.Medicare benefits. Medicaid benefits.Medicaid benefits.

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Retirement benefits:Retirement benefits: Eligible at age 67 for people born after 1959.Eligible at age 67 for people born after 1959. Workers who retire earlier will receive lower benefits.Workers who retire earlier will receive lower benefits.

Disability benefits:Disability benefits: Eligible if worker has severe physical or mental Eligible if worker has severe physical or mental

condition preventing him or her from working that is condition preventing him or her from working that is expected to last at least 12 months or result in death.expected to last at least 12 months or result in death.

Survivors’ benefits:Survivors’ benefits: If a worker dies, benefits are paid to family members.If a worker dies, benefits are paid to family members.

Supplemental Security Income (SSI):Supplemental Security Income (SSI): Benefits for Benefits for people with disabilities who have little income.people with disabilities who have little income.

Medicare BenefitsMedicare Benefits

Medicare: Medicare: The health insurance program The health insurance program provided through social security.provided through social security.

The program was created to give older The program was created to give older citizens and people with disabilities citizens and people with disabilities affordable health insurance.affordable health insurance.

Medicare provides hospital insurance, Medicare provides hospital insurance, medical insurance, and prescription drug medical insurance, and prescription drug insurance.insurance.

Medicaid BenefitsMedicaid Benefits

Medicaid: Medicaid: A health care program funded A health care program funded by the government for those people who by the government for those people who cannot pay for health services.cannot pay for health services.

The program is run by participating states The program is run by participating states that set the income level for acceptance that set the income level for acceptance into the program.into the program.

Medicaid covers hospital, laboratory, and Medicaid covers hospital, laboratory, and clinic services in most states. Some states clinic services in most states. Some states include additional services.include additional services.

Workers’ CompensationWorkers’ Compensation

Workers’ compensation is Workers’ compensation is an insurance program an insurance program managed by the states managed by the states that provides payments to that provides payments to workers who have been workers who have been injured on the job.injured on the job.

Benefits include:Benefits include: Medical care benefits.Medical care benefits. Disability income.Disability income. Rehabilitation benefits.Rehabilitation benefits. Death benefits.Death benefits.

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Medical care benefits:Medical care benefits: All medical expenses are All medical expenses are

covered, including covered, including hospital costs, doctors’ hospital costs, doctors’ fees, and rehabilitation fees, and rehabilitation services.services.

Disability income:Disability income: Disabled workers who Disabled workers who

cannot come back to cannot come back to work receive a work receive a percentage of their percentage of their weekly wage until they weekly wage until they return to work.return to work. continue

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Rehabilitation benefits:Rehabilitation benefits: Money for retraining workers whose injuries Money for retraining workers whose injuries

force them to give up their jobs.force them to give up their jobs. Death benefits:Death benefits:

A deceased worker’s spouse or children receive A deceased worker’s spouse or children receive a certain amount of money.a certain amount of money.

Unemployment InsuranceUnemployment Insurance

Unemployment insurance:Unemployment insurance: Provides Provides benefits to workers who have lost their benefits to workers who have lost their jobs.jobs.

Common requirements to qualify for Common requirements to qualify for unemployment insurance:unemployment insurance: Length of employment meets minimum Length of employment meets minimum

requirement, usually one year.requirement, usually one year. Loss of job through no fault of the worker.Loss of job through no fault of the worker.

These benefits are not permanent. They These benefits are not permanent. They are meant to provide income security until are meant to provide income security until the worker has another job.the worker has another job.

Thinking BackThinking Back

What are the different What are the different forms of income an forms of income an employee can receive?employee can receive?

What is the difference What is the difference between gross pay between gross pay and net pay?and net pay?

How are consumers How are consumers taxed and what types taxed and what types of taxes do they pay?of taxes do they pay?

What benefits are What benefits are provided through the provided through the social security social security program?program?

Documents

Part 6Managing Your Income Chapter 23 Understanding Income and Taxes