Taxes & SpendingTaxes & Spending

Payroll DeductionsPayroll Deductions

4.01 – Explain taxes on 4.01 – Explain taxes on income.income.

DeductionsDeductions Amount of money that is subtracted Amount of money that is subtracted

from gross earnings from gross earnings

EquationEquation Gross earnings-Deductions=Net Gross earnings-Deductions=Net

earnings (take home pay)earnings (take home pay)

Deductions Required by LawDeductions Required by Law

Federal Income TaxFederal Income Tax Social Security TaxSocial Security Tax

State and Local TaxesState and Local Taxes Court Ordered DeductionsCourt Ordered Deductions

Federal Income TaxFederal Income Tax

Based on a person’s earned incomeBased on a person’s earned income Employers withhold taxes based onEmployers withhold taxes based on

– $ amount of wages paid,$ amount of wages paid,– The employee’s W-4 form, status, exemptionsThe employee’s W-4 form, status, exemptions– Federal tax tablesFederal tax tables

““Pay as you go” system for employee-Pay as you go” system for employee-– Taxes deducted from each checkTaxes deducted from each check– Estimate of final tax due (when file tax return)Estimate of final tax due (when file tax return)

Payments sent (remitted) to the Payments sent (remitted) to the IRS IRS www.irs.govwww.irs.gov

Federal Income TaxFederal Income Tax

Why do you think it is important to Why do you think it is important to withhold taxpayers money as it is withhold taxpayers money as it is

earned?earned?

What are the advantages for the What are the advantages for the government?government?

and the taxpayer?and the taxpayer?

Form W-4, NC-4Form W-4, NC-4 Federal form for employee’s withholding Federal form for employee’s withholding

allowance certificate that shows the number allowance certificate that shows the number of allowances claimed for federal income of allowances claimed for federal income taxes.taxes.

NC-4 for North NC-4 for North Carolina withholdingCarolina withholdingCertificateCertificate

****Both forms must be filled out, signed and filed with ****Both forms must be filled out, signed and filed with employer before 1employer before 1stst paycheck is issued paycheck is issued

Factors that Determine the Factors that Determine the Amount Withheld for Federal Amount Withheld for Federal

Income TaxesIncome Taxes

Employee’s marital Employee’s marital statusstatus

Number of Number of exemptions exemptions claimed claimed by the employeeby the employee

Employee’s gross Employee’s gross earningsearnings

How can you qualify “EXEMPT” How can you qualify “EXEMPT” for withholding?for withholding?

A.A. Did not have federal income tax Did not have federal income tax liability in the previous year.liability in the previous year.

B.B. Expect no tax liability this year.Expect no tax liability this year.

C.C. Has income of $700 or less Has income of $700 or less including non-wage income such as including non-wage income such as interest on a savings account.interest on a savings account.

D.D. Cannot be claimed as dependent on Cannot be claimed as dependent on someone else’s tax return.someone else’s tax return.

Exemptions/AllowancesExemptions/Allowances

Determines the amount of income tax Determines the amount of income tax to be withheld for to be withheld for federal income federal income taxestaxes

The greater the number of allowances The greater the number of allowances claimed, the lower the amount of claimed, the lower the amount of income tax withheld from earnings.income tax withheld from earnings.

* If you have a lot of children, you * If you have a lot of children, you need more money now, not as a need more money now, not as a refund after filing your tax return. refund after filing your tax return.

Tax TableTax Table

Shows the amount of Shows the amount of taxes to be withheld taxes to be withheld from employees each from employees each pay period based on pay period based on their filing status their filing status (single, married, head (single, married, head of household, etc.)of household, etc.)

Computerized payroll Computerized payroll software programs software programs (spreadsheets) use tax (spreadsheets) use tax tables to calculate tables to calculate payrollpayroll

$ Tax due = $ Income (Base) x % Rate

Amounts are set up on tax tables

Social Security TaxSocial Security TaxFICA - Federal Insurance Contributions FICA - Federal Insurance Contributions

ActAct Employers collect/match FICA for the federal Employers collect/match FICA for the federal

government.government.

Provides income for RSDHI:Provides income for RSDHI:1.1. RRetirement (Old Age) Programsetirement (Old Age) Programs

2.2. SSurvivor’s Benefits Programsurvivor’s Benefits Programs3.3. DDisability Insurance Programsisability Insurance Programs

4.4. HHealth ealth IInsurance- nsurance- Medicare Program Medicare Program (for age =>65 years old)(for age =>65 years old)

www.ssa.govwww.ssa.gov

FICAFICA

Federal Insurance Contributions Act (1935)Federal Insurance Contributions Act (1935) Established the present social security Established the present social security

systemsystem Employers and employees Employers and employees bothboth contribute contribute DO NOT EXPECT FICA TO TAKE CARE OF DO NOT EXPECT FICA TO TAKE CARE OF

YOU IN RETIREMENT! Save your own nest YOU IN RETIREMENT! Save your own nest egg and supplement with FICA.egg and supplement with FICA.

How to calculate FICA – base x rateHow to calculate FICA – base x rate– $ Income (base) x 7.65% (FICA rate)$ Income (base) x 7.65% (FICA rate)

FICA TaxesFICA Taxes

1)1) Social Security 6.2% (1998 – maximum Social Security 6.2% (1998 – maximum taxable earnings amount was $68,400)taxable earnings amount was $68,400)

2)2) Medicare 1.45% (no maximum taxable Medicare 1.45% (no maximum taxable earnings amount)earnings amount)

Total FICA Taxes = 7.65% withheld (deducted) Total FICA Taxes = 7.65% withheld (deducted) from employee from employee andand matched by employermatched by employer

.0765 x 2 = 15.3% of every check sent to Federal .0765 x 2 = 15.3% of every check sent to Federal Government Social Security account in your Government Social Security account in your namename

State and Local Income State and Local Income TaxesTaxes

MOST states and cities tax the earnings of MOST states and cities tax the earnings of the people who live and work within their the people who live and work within their boundariesboundaries

In some states and cities, tax rates are a In some states and cities, tax rates are a set % of gross earnings, like social security.set % of gross earnings, like social security.

NC Department of Revenue collects income NC Department of Revenue collects income taxestaxes

How do I calculate state tax? Rate x BaseHow do I calculate state tax? Rate x Base– $Income earned (base) x NC Rate (from tax $Income earned (base) x NC Rate (from tax

tables)tables)

Other Other InInvoluntary voluntary DeductionsDeductions

Garnishment of wages- court orders Garnishment of wages- court orders employer to deduct from employee’s employer to deduct from employee’s payrollpayroll– Child supportChild support– AlimonyAlimony– Lawsuits Lawsuits – Old tax debt owedOld tax debt owed

Maximum garnishment of wages = Maximum garnishment of wages = 25%25%

Common Common VoluntaryVoluntary DeductionsDeductions

Health InsuranceHealth Insurance Dental InsuranceDental Insurance Vision InsuranceVision Insurance Life InsuranceLife Insurance Disability Disability

InsuranceInsurance 401K, 403B, IRA 401K, 403B, IRA

retirement plansretirement plans

Charitable Charitable ContributionsContributions

U.S. Savings U.S. Savings BondsBonds

Union DuesUnion Dues Credit Union Credit Union

Deposits Deposits Credit Union Loan Credit Union Loan

PaymentsPayments

Form W-2Form W-2

Reports employee’s income earned Reports employee’s income earned in the previous calendar year and in the previous calendar year and how much money was withheld for how much money was withheld for state & federal taxes.state & federal taxes.

Employers are required to give all Employers are required to give all employees a copy of the W-2 Form employees a copy of the W-2 Form by January 31by January 31stst..

Used to file individual tax return Used to file individual tax return – Form 1040 or 1040 EZ by April 15Form 1040 or 1040 EZ by April 15thth..

Individual Income Tax Individual Income Tax ReturnReturn

All income taxes (federal, state, local) All income taxes (federal, state, local) are withheld from payroll by estimatesare withheld from payroll by estimates

The W-4 or NC-4 are used to calculate The W-4 or NC-4 are used to calculate the estimated taxthe estimated tax

After year end, 12-31, individuals must After year end, 12-31, individuals must file a tax return (1040, or 1040- EZ) file a tax return (1040, or 1040- EZ)

Tax returns compares the estimated Tax returns compares the estimated tax paid to the actual tax due tax paid to the actual tax due

Individuals either owe $ or get $ back. Individuals either owe $ or get $ back.

Corporate Tax ReturnsCorporate Tax Returns

Corporations pay tax on their profitCorporations pay tax on their profit Profit = income - tax deductible expensesProfit = income - tax deductible expenses Use form 1120 to file returnUse form 1120 to file return May file using a fiscal year not calendar May file using a fiscal year not calendar

yearyear– Ex: A corp chooses fiscal year 4-1 through 3-31Ex: A corp chooses fiscal year 4-1 through 3-31– Spreads tax returns throughout the year, not Spreads tax returns throughout the year, not

just April 15just April 15– Allows business to plan around a busy time of Allows business to plan around a busy time of

yearyear