Understanding Taxes …and understanding your paycheck!

Objectives

• Summarize the purpose of paying taxes.

• Recognize the parts of a paystub.

• Differentiate between net and gross income.

• Explain what W-2 and W-4 forms are and what they are

used for.

• Complete a 1040EZ tax form.

Key Terms

• Income – wages received in exchange for labor

• Gross pay – amount of money made before taxes are withheld

• Net pay – amount of money that people receive after paying taxes on their income

• Income tax – tax on the amount people earn

• People who earn more pay a higher percentage of their income in taxes

• Dependents – a Qualifying Child or Qualifying Relative for whom you can claim a tax exemption.

Primary Sources of

Employment

• Hired by a business or an employer

• You are self-employed

Salary vs. Hourly Wage

Salary

• Set amount of $

• Not dependent on number of hours worked

• Example: $30,000/year

Hourly wage

• Specific rate for every hour worked

• Example: $16.00/hour

• WEEKLY

• 52 pay periods a year

• BI-WEEKLY

• 26 pay periods a year

• BI-MONTHLY

• 24 pay periods a year

• MONTHLY

• 12 pay periods a year

Pay Periods

Payroll Deductions

Gross income: Amount of

money earned before payroll

taxes

DeductionsNet incometake home

pay

Mandatory Optional

Taxes - Overview

Income

Payroll

Property

Sales

Excise

Withheld

from

wages

Paid at the

time of

purchase

INCOMEFederal Income Tax

State Income Tax

PayrollSocial Security

Medicare

Insurance

Retirement

Why do we pay taxes?

Internal Revenue Service

(IRS)

• The IRS is the U.S. government agency responsible for

tax collection and tax law enforcement.

Exemptions and

Deductions

• Personal and dependent exemptions for yourself and

qualifying family members reduce the amount of income

on which you will be taxed.

W-4 (Federal)

• Federal Tax

• Allows employers to determine what amount of income tax

they should deduct from each employee’s paycheck based

on that person’s situation

• The IRS recommends that employees submit a W-4 form

• Each year

• Any time their personal or financial situation changes.

• If over the course of the year more of your income than

necessary was withheld, you will receive a refund from the

federal government. If you did not withhold enough

income, you will owe the federal government more money.

W-4 (Federal)

W-4 (Federal)

• Claiming 0 Allowances • Maximum taxes withheld

• Likely to get a sizeable tax refund

• If you are a dependent on someone else’s tax return you should claim 0

• Claiming 1 Allowance• Best option if you are single with one job

• Will likely get a tax refund

• Claiming 2 Allowances • If you are single, claiming two allowances will get you close to your

tax liability but may result in tax due when filing your taxes.

• If you are single and work more than one job, you can claim one allowance at each job or two allowances at one job and zero at the other.

• If you are married, you should claim two allowances

• Claiming 3 Allowances• If you are married and have one child, you should claim three

allowances.

• Additional Allowances

W-4 (Federal)

• What should you claim?

• Give it a try!

W-4 (Iowa)

• Iowa Tax Withholding

Pay Period:

The lengthof time for

which an

employee

earns wages

Reading Your Paystub

Gross Income:

The total

amount of

money earned

before payroll

withholdings

Reading Your Paystub

Payroll Deductions:Items deducted

from gross pay.

Typically around

30%.

Typically include:

• Federal

withholding

• State

withholding

• FICA

Reading Your Paystub

Deductions this pay

period

Accumulated

deductions for the

year

Reading Your Paystub

Net Income:The check

amount that

is often

referred to as

the take

home pay.

Reading Your Paystub

W-2 (Federal)

• The W-2 form is the form that an employer must send to

an employee and the Internal Revenue Service (IRS) at

the end of the year.

• The W-2 form reports an employee's annual wages and

the amount of taxes withheld from his or her paycheck.

W-2 (Federal)

Example

Confused about the W-2?

• http://www.forbes.com/sites/kellyphillipserb/2014/02/11/

understanding-your-tax-forms-the-w-2/#687ff7af4756

1099 (Federal)

• Reports income from self employment earnings, interest

and dividends, government payments, and more.

• Usually provided by a bank or other organization or filled

out by an individual using information from accounts.

• There are several different forms to choose from so be

sure to file the correct forms!

1099 (Federal)

1040EZ / 1040A / 1040

(Federal)

• The IRS Form 1040 is one of the official documents that

U.S. taxpayers can use to file their annual income tax

return (three types).

• The form is divided into sections where you can report

your income and deductions to determine the amount of

tax you owe or the refund you can expect to receive.

1040EZ (Federal)

Step-by-Step

• http://www.wikihow.com/Fill-Out-a-US-1040EZ-Tax-

Return

• Let’s try to together!

• Income: $40,000

• Taxable Interest: $500

1040 IA

(Iowa)

• IA taxpayers can use to file their annual income tax return

• The form is divided into sections where you can report

your income and deductions to determine the amount of

tax you owe or the refund you can expect to receive.

How to File

• Paper copy – mail in (FREE)

• Online copies – mail in or submit electronically (FREE)

• H&R Block – Software ($40)

• Asks basic questions

• Helps to fill out form

• Adds/subtracts for you

• Accounting Firm ($100+)

What You Need!

• Personal Information (Tax-Related Information)

• W-4 Form (Federal Tax Withholding Form)

• W-2 Form (Federal Income Information)

• 1099 (Federal Savings Account Interest)

• 1040EZ (Federal Tax Filing)

• IA W-4 Form (Iowa Tax Withholding Form)

• W-2 Form (Federal Income Information)

• 1040 IA (Iowa Tax Filing)

• YOU MAY NEED MUCH MORE!

Resources

• https://tax.iowa.gov/

• https://www.irs.gov/

• Iowa Tax Table

• https://tax.iowa.gov/sites/files/idr/forms1/2017TaxTables.pdf

• Federal Tax Table

• https://www.irs.gov/pub/irs-pdf/i1040ez.pdf