Understanding Pay and Benefits Federal Income Tax PAY, BENEFITS, AND FEDERAL INCOME TAX

Understanding Pay and Benefits

Federal Income Tax

PAY, BENEFITS, AND FEDERAL INCOME TAX

Week 4 - Pay, Benefit, & Fed Income Tax

Understanding Pay and Benefits

GOALSCompute payroll deductions and net pay.

Identify optional and required employee benefits.

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Gross Pay, Deductions, and Net PayGross pay is the total amount you earn

before any deductions are subtracted.

Amounts subtracted from your gross pay are called deductions.

When all deductions are taken out of your gross pay, the amount left is your net pay.

Gross Pay – Deductions = Net Pay

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Gross Pay Calculation

1. Regular Pay = Regular Hours x Regular Rate

2. Overtime Rate = Regular Rate x 1.5

3. Overtime Pay = Overtime Hours x Overtime Rate

4. Gross Pay = Regular Pay + Overtime Pay

Regular Pay + Overtime Pay = Gross Pay

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Example of Gross PayCalculations for Hourly Employee

Type of Pay Hours Rate Amount

Regular pay 40 × $8.00 per hour = $320.00

Overtime pay 4 × $12.00 per hour = 48.00

Gross pay $368.00

Week 4 - Pay, Benefit, & Fed Income TaxSLIDE 5


SalarySalary may be stated as an annual amount.

The annual amount is divided into equal amounts to be paid each pay period.

Common pay periodsMonthlyTwice a monthEvery two weeksWeekly

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Example of Gross PayCalculations for Salaried Employee

Annual Salary

÷Pay Period

per Year=

Gross Pay per Paycheck

Monthly $24,000 ÷ 12 = $2,000

Twice a month $24,000 ÷ 24 = $1,000

Every two weeks $24,000 ÷ 26 = $923.08

Weekly $24,000 ÷ 52 = $461.54

Week 4 - Pay, Benefit, & Fed Income TaxSLIDE 7


DeductionsAmounts subtracted from your gross pay

are called deductions.

Some deductions, such as Social Security tax and Federal Income tax, are required by law.

Other deductions are optional.

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Net PayWhen all deductions are taken out of your

gross pay, the amount left is your net pay.

Amount of your paycheck

“Take-home pay”

Amount you can actually spend as you wish

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Benefits and Incentives

Profit sharingPaid vacations and

holidaysEmployee servicesChild careSick payLeaves of absence

InsuranceBonuses and stock

optionsPension and

savings plansTravel expenses

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Profit SharingProfit sharing is a plan that allows employees

to receive a portion of the company’s profits at the end of the corporate year.

The more profits the company makes, the more the company has to share with employees.

Profit sharing is considered incentive pay—money offered to encourage employees to strive for higher levels of performance.

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Paid VacationMost businesses provide full-time

employees with a set amount of paid vacation time.

While you are on vacation, you are paid as usual.

The amount of vacation time often varies with years of service.

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Paid HolidaysPaid holidays typically include: Christmas,

Thanksgiving, Fourth of July, Labor Day, and Memorial Day.

Other holidays that many companies consider paid holidays are New Year’s Day, Veterans Day, Martin Luther King Day, and Presidents Day.

An employee required to work on a holiday is usually paid double or more than double the regular hourly rate of pay.

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Employee ServicesEmployee services are the extras that

companies offer in order to improve employee morale and working conditions.

Examples include:Employee discountsSocial and recreational programsFree parkingTuition reimbursement for college coursesWellness programsCounseling for employee problems

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Child CareOnsite child-care facilities

Coverage of child-care expenses as a part of employee benefit packages

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Sick PayMany businesses also provide an

allowance of days each year for illness, with pay as usual.

It is customary to receive three to ten days a year as “sick days” without deductions from pay.

SLIDE 16


Leaves of AbsenceSome employers allow employees to

temporarily leave their jobs (without pay) and return to their jobs at a later time.

There are often restrictions on the reason for a leave, such as having children or completing education.Disadvantage: UnpaidAdvantage: Job security

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Personal DaysSome employers allow personal days

(absences for personal reasons) so that employees can attend to important matters without calling in “sick” when they aren’t sick.

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InsuranceMost large companies provide group

insurance plans for all employees.A few plans are paid for almost entirely by the

employer, as a part of employee compensation. Most plans require that employees pay for part

of their own coverage, as well as to cover dependents.

Common types of insurance plansGroup health insuranceGroup life insuranceGroup dental insuranceGroup vision insurance

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Bonuses and Stock OptionsBonuses are incentive pay based on

quality of work done, years of service, or company sales or profits.

Stock options give employees the right to buy a set number of shares of the company’s stock at a fixed price.

SLIDE 20


Pension and Savings PlansPension plans are funded by the employer.

Retired employees receive a monthly check.

Employees become vested (entitled to the full retirement account) after a specified period of time, such as five years.

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Employer-Sponsored Retirement Savings Plans

Common plans401(k) for private employers403(b) for government employers

Employees put money in these accounts.

The employer may also (but is not required to) contribute money to the employee’s account.

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Travel ExpensesCompany car

Mileage allowance

Daily allowance to cover hotel, meals, and other travel expenses

Expense reports and receipts

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Evaluating Employee BenefitsBenefits generally are not taxable to

employees (except bonuses and other benefits paid in cash), yet they provide valuable coverage and advantages.

Generally, large companies provide more extensive optional benefits than do small companies.

In recent years, employee benefits have been expanded to meet the needs of different life situations.

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Our Tax System

Filing Tax Returns

FEDERAL INCOME TAX


Our Tax System

GOALSExplain the purpose of taxes and describe

the different types of taxes.

Describe the U.S. tax system and explain how it works.

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Purpose of TaxesIn a free enterprise system such as ours,

the government collects money from citizens and businesses in the form of taxes.

These incoming funds to the government are called revenue.

The government spends the revenues received according to priorities set by Congress.

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Progressive TaxesProgressive taxes take a larger share of

income as the amount of income grows.

Federal income taxes are progressive.

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Components of the Tax SystemThe IRS

The power to tax

Paying your fair shareTax rates apply to income ranges, or tax

brackets.Our income tax system is based on voluntary

compliance, which means that all citizens are expected to prepare and file tax returns of their own accord without force.

SLIDE 29


Components of the Tax SystemFailure to pay taxes

Failure to do so can result in a penalty: interest charges on the taxes owed plus a possible fine.

Willful failure to pay taxes is called tax evasion, which is a serious crime punishable by a fine, imprisonment, or both.

(continued)

SLIDE 30


An IRS AuditEvery year, the IRS calls millions of

taxpayers for an audit, which is an examination of their tax returns.

Types of auditsOffice auditCorrespondence auditField audit

SLIDE 31


Filing Tax Returns

GOALSDefine basic tax terminology.

Prepare tax forms 1040EZ and 1040A.

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Filing StatusFiling status describes your tax-filing

group.

You must mark one of the following as your filing status on your tax form:Single person (not married)Married person filing a joint returnMarried person filing a separate return“Head of household”Qualifying widow(er)

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ExemptionsAn exemption is an amount you may

subtract from your income for each person who depends on your income to live.

Each exemption reduces your taxable income and thus your total tax.

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Exemptions—Who QualifiesYourself, unless someone else claims you

on their return

Your spouse, if you are filing jointly

Your dependentsA dependent is a person who lives with you

and for whom you pay more than half his or her living expenses.

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Gross IncomeGross income is all the taxable income

you receive.

Earned income refers to money you earned from working.

Unearned income refers to money you received from passive activity (other than working).

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Common Types of IncomeWages, salaries, and tipsInterest incomeDividend incomeUnemployment compensationSocial security benefitsChild supportAlimony

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Adjusted Gross IncomeThe law allows you to subtract some types of

spending from gross income.You can “adjust” your income by subtracting such

things as contributions to individual retirement accounts, student loan interest, and tuition and fees.

These adjustments are subtracted from gross income to determine adjusted gross income. Adjustments reduce income that is subject to tax. Note that these adjustments are not available on

Form 1040EZ.

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Adjusted Gross Income

Gross income

– Adjustments

Adjusted gross income

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Taxable IncomeTaxable income is the income on which

you will pay tax.

SLIDE 40


Taxable Income

Gross income

– Adjustments

Adjusted gross income

– Deductions

– Exemptions

Taxable income

(continued)

SLIDE 41


DeductionsItemize deductions

Standard deduction

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Itemize DeductionsItemize deductions are expenses you can

subtract from adjusted gross income to determine your taxable income.

Examples include: Medical and dental expenses beyond a specified

percentage of your income State and local income taxes Property taxes Home mortgage interest Gifts to charity Losses from theft or property damage Moving expenses

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Standard DeductionIf you do not have many deductions, your

tax may be less if you take the standard deduction.

The standard deduction is a stated amount that you may subtract from adjusted gross income instead of itemizing your deductions.

This amount changes each year.

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Tax CreditsA tax credit is an amount subtracted directly

from the tax owed. It is different from a deduction.

A deduction is subtracted from adjusted gross income. It reduces your tax by reducing the amount of income on

which the tax is figured.

A tax credit reduces the tax itself.

The government allows tax credits for certain education expenses, child-care expenses, and other reasons from time to time.

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Preparing Your Income Tax ReturnWho must file?When to file?Which form to use?Where to begin?Filing electronicallyTax preparation software

SLIDE 46


Form 1040EZStep 1: Name, address, and Social

Security numberStep 2: Report incomeStep 3: Compute taxStep 4: Refund or amount owedStep 5: Sign the return

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Form 1040AStep 1: Name and addressStep 2: Filing statusStep 3: ExemptionsStep 4: IncomeStep 5: Adjusted gross incomeStep 6: Taxable incomeStep 7: Tax, credits, and paymentsStep 8: Refund or amount owedStep 9: Signature

SLIDE 48

Documents

Understanding Pay and Benefits Federal Income Tax PAY, BENEFITS, AND FEDERAL INCOME TAX