WAGES AND
INCOME TAX
(How much will you keep?)
Employment Classifications
Full-Time
 Full access to benefits & better pay
Part-Time
 Fewer hours – benefits may or may not be offered
Temporary
 Short-term assignments (leaves / busy periods)
 Employment agencies may provide benefits
Contract
 Specified time period for project completion
 Usually no benefits unless stated in contract
GROSS PAY / DEDUCTIONS & NET
PAY
 Your paycheck (stub) contains vital
information which needs to be
reviewed and understood
 GROSS PAY = Total pay before deductions
 Net Pay = The amount of your paycheck after
deductions (“Take-home Pay”)
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Regular Wages or Salary + Overtime = Gross Pay
Gross Pay – Deductions = Net Pay
 Direct Deposit
Hourly vs. Salaried Employees
 Hourly Wages:
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(Rate of pay) x (# of hours worked)
Overtime pay must be calculated at 1.5x rate of pay (Fair
Labor Standards Act) – standard work week is 40 hours
Minimum wage in IL - $8.25 (subminimum wage)
Commission / Tips / Piecework
 Salaried Employees:
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Regular hours & a set amount of pay (usually stated as
yearly salary & broken into equal increments)
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Example - $36,000 annual salary – no overtime unless
negotiated
Monthly Pay – ($36,000 / 12 = $3000 per month gross)
Bi-weekly – ($36,000 / 26 = $1384.62 every 2 weeks)
Bi-monthly – ($36,000 / 24 = $1500 twice a month)
Weekly – ($36,000 / 52 = $692.30 every week)
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REQUIRED Deductions
Amounts subtracted from gross pay (Government)
 Federal / State & Local Income Tax
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Support multiple “public goods” & “programs” (roads /
schools / defense / welfare / etc.)
The largest source of income for the Federal government
is from Income taxes (43% of all revenue)
 Social Security Tax (FICA)
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Federal Insurance Contributions Act
Government supported retirement program
% of Gross Income
Employer matches
 Medicare Tax
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Government supported health insurance for retirees
% of Gross Income
Employer matches up to certain $ amount
OPTIONAL Deductions
Amounts subtracted from gross pay (Personal Option)
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Health Insurance
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PPO / HMO / etc.
Retirement Savings (401k / 403b / etc.)

Vested
Life Insurance
 Union Dues
 Employee Stock Options Plan
 Savings Accounts
 Various Others (parking / gym / etc.)
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Homework
 Review Questions - Chapter 8 (pg. 206; 1-13)
(Due Wednesday)
TYPES OF TAXES
Progressive Taxes (Income Tax):
 The more you earn – the higher amount of tax
comes out of your pocket (Tax Brackets)
Regressive Taxes (SALES TAX):
 Smaller share of income is collected as income
grows – SALES TAX is regressive – straight % for
sales tax
Proportional Taxes (PROPERTY TAX):
 FLAT TAX – all members of a community pay the
same amount regardless of earnings or value
FEDERAL INCOME TAX
THE UNITED STATES TAX SYSTEM
 All U.S. citizens
and businesses
pay taxes to the
government which
the government
uses for a variety
of purposes –
public education /
police / fire / roads
/ etc.
INCOME TAX – DOCUMENTS
 Statement of Annual Earnings (Form W-2)
 Sent by employer before January 31 http://www.irs.gov/pub/irs-pdf/fw2.pdf
 Employee Withholding Sheet (Form W-4)
 This will let the employer know how much to take
out of you pay for taxes (page 201) - 2010 W4.pdf
 If this form is completed incorrectly you may have
too much or too little take out of your paycheck
 Withholding too much
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This will result in a tax REFUND after filing
Some people may use this to save money – no saving’s interest
 Withholding too little
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This will result in a tax liability – you will owe more $$ to IRS
Avoid this tax bill by: paying extra $$ / change your allowances
Progressive Taxes
INCOME TAX
 The ability-to-pay principle - individuals with higher income
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should pay a higher percentage of their income
Income tax is progressive – the more money earned the higher %
is required to pay to the government
Approved and changed by Congress and the President
Collected by the Internal Revenue Service (IRS)
Based on Voluntary Compliance & people paying fair share
Determined by a tax return filled out by April 15 of each year
based on the “Tax Formula”
GROSS INCOME (Wages / interest / tips / etc.)
-ADJUSTMENTS (Retirement plans / alimony / etc.)
=ADJUSTED GROSS INCOME
-ITEMIZED DEDUCTION or STANDARD DEDUCTION
-EXEMPTIONS
=TAXABLE INCOME
***Tax Tables will determine how much will be paid
TAX RETURNS

Returns should be completed with the idea of paying your fair
share & taking advantage of all laws designed to give tax relief

Every American files a tax return before April 15th of each year to
determine if they have paid the correct tax amount based on their
total income
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You may file online (www.irs.gov) – Turbo-tax
Filing Status
 Single (not married)
 Married filing jointly
 Married filing separately
 Head of Household (providing a home for dependent people
whether married of single & qualified)
WHICH TAX FORM?
Form 1040EZ - 2010 (1040ez).pdf
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Single or Married filing jointly
One Exemption for self & spouse if applicable
Income less than $50,000 on Line 6 of form
Income from wages, salaries, tips / Interest income of less than
$1500 / Unemployment compensation / Taxable scholarship
Form 1040A - 2010 (1040A).pdf
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Any filing status
All exemptions you qualify for
Income less than $50,000 on Line 25
Income from same as above
Form 1040 -f1040[1].pdf
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Any filing status
All exemptions you are entitled to
Any amount of Income
All sources income are eligible
Taxable Income
 Wages / salaries / tips
 Interest income
 Dividend income
 Unemployment compensation
 Social Security benefits (85% in some cases)
 Alimony -- maintenance
 “Other” income (businesses / royalties / estate
income / trust income / pensions / gambling
winnings / sale of personal items
Dependents / Exemptions

More dependents claimed the less tax paid (WHO?)
1.
2.
3.
4.
5.
6.
Person living with you receiving more than half his/her
living expenses from you
Person must be a relative – child, stepchild, adopted
child, etc.
Person must be a U.S. citizen of resident of the U.S.
The person may not file a return and claim himself or
herself as an exemption
The person’s income may not exceed the amount of his
or her exemption
After age 1 all dependents must have a social security
number
Self-Employed Individuals
 Required to claim
income over $400
annually (Form 1040)
 Many businesses
must pay taxes
quarterly depending
on revenue
 Schedule C (Profit or
Loss Statement) is
attached
Tax Planning
 Understanding laws and guidelines for filing
taxes is important to pay the correct amount
each year
 http://www.youtube.com/watch?v=IroCYzwW
ZtU
Financial Planning