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LGEBRA 1

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ECONOMIC D

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REMINDER!

If you have or have had a job, please consider sharing what your pay stub looks like with the class by bringing it in.

KEY Q

UESTI

ONS

Do you agree with the statement: Managing your life means managing your money.

Why do you need to know how much money you’ll bring in?

Is it necessary to check that the withholdings and the deductions are correct? Why or why not?

What are some common deductions taken from wages?

What You’ll LearnWhat You’ll LearnSection 2-Section 2-11

Read tables to find the amount withheld for federal income tax.

Compute the state tax on a straight percent basis.

Determine the state taxes on a graduated income basis.

Work out the amount of income withheld for Social Security and Medicare taxes.

Section 2-Section 2-

33

Section 2-Section 2-

44

Section 2-Section 2-

22

Section 2-Section 2-55

Calculate the deduction for group insurance.

Figure out net pay per pay period.Section 2-Section 2-

66

Federal taxes are necessary to keep the government agencies and services afloat (defense,

Federal Income Tax (FIT) - employers are required by law to withhold a certain amount of their pay for FIT.

The Internal Revenue Service (IRS)- provides employers with tables that show how much money to withhold.

WHAT DO YOUR FEDERAL INCOME TAXES DO?

HOW DOES THE USA COMPARE TO OTHER COUNTRIES?

The amount withheld depends on your income, marital status, and withholding allowances.

You may claim one allowance for yourself, one for your spouse if you are married, and additional allowances for any others you support.

You may request to have more money withheld – you would want to do this if you expect to owe money.

Each year, you should reevaluate how much is withheld and make appropriate adjustments by filling out a W4 form.

Employers then take the information from your W4 and use tax tables to look up how much to withhold from your pay.

EXAMPLE 1

Carla’s gross pay for this week is $425.88. She is married and claims 2 allowances-herself and her husband. What amount will be withheld from Carla’s pay for FIT?

Step1: Find the income range from the federal tax tables on pages 788-791 in your textbook.

Step 2: Find the column for 2 allowances

Step 3: The amount of income to be withheld is…

$19

EXAMPLE 2

Lance’s gross pay for this week is $460.00. He is married and claims 1 allowance. What amount will be withheld from Lance’s pay for FIT?Steps:

1. Find the income range from the federal tax tables on pages 788-791 in your textbook.

2. Find the column for 1 allowance.

3. The amount of income to be withheld is…

$31

Use the tax tables on pages 788-791 in your textbook to find the amount withheld.

Joseph Napoli, single.Earns $524 per week.Claims 2 allowances.What is the FIT withheld?

YOUR TURN!

$48

Use the tax tables on pages 788-191 in your textbook to find the amount withheld.

Amanda Hagel earns $476 a week. She is married and claims 2 allowances. Next year she will have a child and will claim an additional allowance. How much less will be withheld for federal income tax next year?

YOUR TURN AGAIN!

$312

EXAMPLE 3

Elijah is paid $427 a week. He is married and claimed 3 allowances last year. This year he lowered his allowances to 1 because he hopes to receive a refund on his next tax return. How much more in withholdings is deducted from his weekly pay now that he claims just 1 allowance? $25 - $13 = $12

Most states require employers to withhold a certain amount of your pay for state income tax.

In some states, the tax withheld is a percent of your taxable wages.

Your taxable wages depend on personal exemptions, or withholding allowances, which allow for supporting yourself and your family.

Important Questions

What formula do I use?

How do I calculate taxable wages?

Taxable Wages = Annual Gross Pay – Personal Exemptions

How do I calculate annual tax withheld?

Annual Tax Withheld = Taxable Wages x Tax Rate

WHAT DO YOUR STATE INCOME TAXES DO?

HOW DOES ALABAMA COMPARE TO OTHER STATES?

The state tax national average is 11% and Alabama is…

EXAMPLE 4 Patricia’s gross pay is $65,800 a year. The state income tax rate is 3 percent of taxable wages. She takes a married exemption for

herself and her husband.

How much is withheld from her gross earnings for state income tax within this year?Step 1: Find the taxable wages.

Annual Gross Pay – Personal Exemptions$65,800.00 – $3,000.00 = $62,800.00

Step 2: Find the annual tax withheld.

Taxable Wages × Tax Rate$62,800.00 × 3% = $1,884.00 tax withheld

EXAMPLE 5Tony’s gross pay is $44, 750 a year. The state income tax rate is 3 percent of taxable wages. He takes a single exemption for himself and 1 personal exemption for a child. How much is withheld from his gross earnings for state income tax for the year?

Step 1: Find the taxable wages.

Annual Gross Pay – Personal Exemptions$44,750 – ($1,500 + $700) =

$44,750 – $2,200 = $42,550

Step 2: Find the annual tax withheld.

Taxable Wages × Tax Rate$42,550 × 3% = $1,276.50 tax withheld

Find the amount withheld:

Tomoko Nakazawa.Earns $38,657 annually.Married, no dependents.What are her personal exemptions?

YOUR TURN

$3,000

Paul Chamello earns $168,000. He is single. His personal exemptions include himself and his five children. The state tax rate is 2.5 percent of taxable income.

What amount is withheld yearly for state income tax?

MORE YOUR TURN!

$4,075

Elizabeth earns $88,900 annually. She is married with 4 dependents. The state tax is 3.8%.

What is withheld for the state tax?

MORE YOUR TURN!

$3,157.80

Reyna earns $43,500 annually. She is single with 2 dependents. The state tax is 4.2 %.

What are her personal exemptions?

What is withheld for the state tax?

MORE YOUR TURN!

$2,900

$1,705.20

Sarah earns $52,388 annually. She is married with 2 children. The state tax is 3.5 % of taxable income.

What is withheld yearly for the state income tax?

MORE YOUR TURN!

$1,679.58

Pg 120-121

#1-15

ASSIGNMENT

WHAT

DO YO

U THIN

K?

Do you think it is fair for someone who earns $10,000 annually to be taxed at the same rate as someone who earns $90,000 annually?

Graduated Income Tax- involves a different tax rate for each of several levels of income. Alabama has a graduated state income tax.

The tax rate increases as income increases.

The tax rate on low incomes is usually 1% to 3%.The tax rate on high incomes may be as much as 20%.

Annual Tax WithheldTax Withheld per Pay Period

Number of Pay Periods per Year

How many months do you think the average person works just to pay taxes?

EXAMPLE 6

Louise’s annual salary is $34,500. She is paid semimonthly (twice a month). Her personal exemptions total $1,500. How much does her employer deduct from each of her semimonthly pay checks for state income tax?

Step 1: Find the taxable wages.

Annual Gross Pay – Personal Exemptions$34,500.00 – $1,500.00 = $33,000.00

Step 2: Find the annual tax withheld.

1.First $1,000: 1.5% of $ 1,000.00 = $

2.Next $2,000: 3.0% of $ 2,000.00 =

3.Next $2,000: 4.5% of $ 2,000.00 =

4.Over $5,000: 5.0% of ($33,000.00 – $5,000.00)

5.0% of =

Total

15.00

60.00

90.00

1,400.00$1,565.0

0

$28,000.00

Taxable Wages = $33,000.00

Step 3: Find the tax withheld per pay period.

Annual Tax Withheld ÷ Number of Pay Periods per Year

Remember she is paid semi-monthly (twice a month)

Annual Tax Withheld = $1,565.00

$1,565.00 ÷ 24 = $65.208 = $65.21

Patricia Hanson.Annual gross pay of $24,300.Personal exemption of $1,500.2 percent state tax on first $5,000.3 percent state tax on amount over $5,000.

What is her taxable income?

YOUR TURN

$22,800

MORE YOUR TURN!

Caroline Pollack’s gross pay is $31,452. She has personal exemptions of $3,600.

How much is withheld from her semimonthly (twice a month) paycheck for state income tax? Round to the nearest cent..State Tax

Annual Gross Pay

Tax Rate

First $3,500 3.0%

Next $3,500 4.5%

Over $7,000 7.0%

$71.76

The Federal Insurance Contributions Act (FICA) requires employers to deduct 5.65% of your gross income for Social Security and Medicare taxes. Employers must also contribute 7.65% for each employee.

Social Security funds the federal system of retirement and disability benefits. Medicare funds health insurance for those 65 years and older.

FICA Tax Employee Employer

Social Security

4.2% up to $4,485.60

6.2% up to $6,621.60

Medicare 1.45% (no limit) 1.45% (no limit)

Tax Withheld = Gross Pay x Tax Rate

EXAMPLE 7Otis’ gross biweekly pay is $648.00. His earnings to date for the year total $15, 228. What amount is deducted from his pay this week for Social Security taxes? For Medicare taxes? What is the total deduction from each pay check?Step 1:Find the Social Security tax withheld.

Gross Pay × Tax Rate

Step 2: Find the Medicare tax withheld.

Gross Pay × Tax Rate

Step 3: Find the total deduction.

Social Security Tax + Medicare Tax

$648.00 × 4.2% = $27.216 = $27.22

$648.00 × 1.45% = $9.396 or $9.40

$27.22 + $9.40 = $36.62

Find the Social Security and Medicare taxes withheld for this pay period.

Tom Mendoza.Monthly salary $4,800.How much deducted this pay period for Social Security? For Medicare?

YOUR TURN

FICA Tax Employee

Social Security

4.2% up to $4,485.60

Medicare 1.45% (no limit)

For Social Security: $201.60

For Medicare: $69.60

Stephanie Metcalf earns $116,000.04 a year. Her salary is paid monthly. What are her year-to-date earnings for November? How much is deducted from her check in November for Social Security? For Medicare?

How much is deducted from her check in December for Social Security? For Medicare?

MORE YOUR TURN!

FICA Tax Employee

Social Security

4.2% up to $4,485.60

Medicare 1.45% (no limit)

Year-to-date earnings for November:

Social Security deduction in November:

Medicare deduction in November:

Social Security deduction in December:

Medicare deduction in December:

$106,333.37

$406.00

$140.17

$19.60

$140.17

Some businesses offer group insurance plans for a lower cost than individual insurance.

Businesses usually pay part of the cost of the insurance and the employee pays the rest.

Employee’s share = Annual Amount x Employee’s Percent

The employee’s amount is usually deducted each pay period, like taxes.

Deductions per Pay Period = per Year ds Pay PerioofNumber

eby Employe dAmount Pai Annual Total

EXAMPLE 8Lawrence Butler is a manager for Sound Pharmaceuticals. He has family medical coverage through the group medical plan that Sound provides for its employees. The annual cost of Butler’s family membership is $4,500. The company pays 80% of the cost. How much does he pay annually for medical insurance?

Step 1: Find the percent paid by employee.

100% – Percent Company Pays

100% – 80% = 20%

Step 2: Find the total amount paid by employee.

Annual Amount × Employee’s Percent

$4,500 × 20% = $900.00

EXAMPLE 9Nicholette McClure is a carpenter for Olympia Construction Company. She has family medical coverage through the group medical plan that Olympia provides for its employees. The annual cost of her family membership is $5,000. The company pays 75% of the cost. How much is deducted from her biweekly paycheck for insurance?

Step 1: Find the percent paid by employee.

100% – Percent Company Pays

100% – 75% = 25%

Step 2: Find the total amount paid by employee.

Annual Amount × Employee’s Percent

$5,000 × 25% = $1,250

Step 3: Find the deduction per pay period.

per Year ds Pay PerioofNumber

eby Employe dAmount Pai Annual Total

$1,250 ÷ 26 = $48.08

Annual cost of insurance: $4,160.Employer pays 80 percent.52 pay periods.Find the deduction per pay period.

YOUR TURN

$16

Ken Fujimoto’s employer pays 90 percent of his medical insurance and 60 percent of his dental insurance. Medical insurance costs $3,400 per year and dental insurance is $1,300.

How much is deducted from Ken’s semimonthly pay for medical insurance? How much for dental insurance?

YOUR TURN AGAIN!

Medical: $14.17

Dental: $21.67

Net pay is the amount you have left over after all tax withholdings and personal deductions have been subtracted from your paycheck.

Net Pay = Gross Pay – Total Deductions

Alysha Moore’s gross weekly salary is $600. She is married and claims 3 allowances. The Social Security tax is 6.2 percent. The Medicare tax is 1.45 percent. The state tax is 1.5 percent. Each week she pays $12.40 for medical insurance and $2.50 for charity.

Is Moore’s earnings statement correct?

Example 1Example 1

Step 1: Find the total deductions.

a. Federal withholding

b. Social Security: 6.2% of $600.00

c. Medicare: 1.45% of $600.00

d. State tax: 1.5% of $600.00

e. Medical insurance

f. Charity

Total

Example 1 Answer: Example 1 Answer:

Step 2: Find the net pay.

Gross Pay – Total Deductions

$600.00 – $104.80 = $495.20

Her statement is correct.

$35.00

37.20

8.70

9.00

12.00

2.50

$104.80

Find the deductions and the net pay. Social Security is 6.2 percent of the first $84,900. Medicare is 1.45 percent of all income.

Use the tax tables on pages 788-791 in your textbook for federal tax. Round to the nearest cent.

YOUR TURN

Pierre Lamont is married and claims 4 allowances. His gross weekly salary is $628. Each week he pays federal, Social Security, and Medicare taxes, as well as $28 for medical insurance and $12 for union dues.

What are his deductions and his net pay?

Federal: $29

Social Security: $38.94

Medicare: $9.11

Net pay: $510.95

Find the deductions and the net pay. Social Security is 6.2 percent of the first $84,900. Medicare is 1.45 percent of all income.

Use the tax tables on pages 788-791 in your textbook for federal tax. Round to the nearest cent.

MORE YOUR TURN!

Michele Sawyer is single and claims 1 allowance. She earns $11.50 per hour as a pest controller and works 40 hours.

Deductions include federal income tax, Social Security, and Medicare. State taxes are 4 percent of gross income, and local taxes are 2 percent of gross income. She pays $42.75 per week for medical insurance.

What are her deductions and net pay for the week?

JOURNAL ENTRY = TICKET OUT THE DOOR

Write several sentences describing your philosophy on money.