CHAPTER 2-NET INCOME
1
CHAPTER 2 GOALS
• How do we calculate Federal Income Tax?
• How do we calculate State Income Tax?
• How do we calculate Graduated State Income Tax?
• How do we calculate Social Security & Medicare Taxes?
• How do we calculate Group Insurance?
• How do we calculate Net Pay from an Earnings Statement?
2
CHAPTER 2 BUSINESS MATH STANDARD(S)
Achievement Standard: Use mathematical
procedures to analyze and solve business problems for
such areas as taxation; savings and investment; payroll
records; cash management; financial statements; credit
management; purchases; sales; inventory records;
depreciation, cost recovery, and depletion.
3
DEFINITIONS to KNOW
• Federal Income Tax
• Withholding Allowances
• Personal Exemptions
• Graduated Income Tax
• Social Security Tax
• Medicare Tax
• Group Insurance
• Net Pay
4
2-1 HOW DO WE CALCULATE F.I.T.?
1.Employers are required by law to withhold
a certain amount of your pay for federal
income tax (FIT).
2.The amount withheld depends on your
income, marital status, and withholding
allowances.
3.You may claim additional allowances for
any others you support (dependents).
5
LET’s PRACTICE
WEEKLY PAYROLL -SINGLE
Velma’s gross pay for this week is
$221.85. She is married and claims 2
allowances, herself and her
husband. What amount will be
withheld from Velma’s pay for
federal income tax?
1)Find the income range from the
table.
WAGES
AT
LEAST
BUT LESS
THAN
0
1
2
3
195
200
210
220
230
200
210
220
230
240
26
27
29
30
32
20
21
22
24
25
14
15
16
18
19
7
9
10
12
13
240
250
260
270
280
250
260
270
280
290
33
35
36
38
39
27
28
30
31
33
21
22
24
25
27
15
16
18
19
21.
WEEKLY PAYROLL -MARRIED
220 to 230
2)Find the column for 2 allowances
3)Find the amount of income to be held.
FIT Withheld is $11.00
ALLOWANCES
WAGES
ALLOWANCES
AT
LEAST
BUT LESS
THAN
0
1
2
3
190
195
200
210
220
195
200
210
220
230
19
19
21
22
24
12
13
14
16
17
6
7
8
10
11
0
1
2
3
5
230
240
250
260
270
240
250
260
270
280
25
27
28
30
31
19
20
22
23
25
13
14
16
17
19
6
8
9
11
12
6
PLEASE DO NOW………….
WEEKLY PAYROLL -SINGLE
1.How much is withheld
from the weekly wage of a
married person earning
$198 with 1 withholding
allowance?
2.How much is withheld
from the weekly wage of a
single person earning $234
with 2 allowances?
WAGES
ALLOWANCES
AT
LEAST
BUT LESS
THAN
0
1
2
3
195
200
210
220
230
200
210
220
230
240
26
27
29
30
32
20
21
22
24
25
14
15
16
18
19
7
9
10
12
13
240
250
260
270
280
250
260
270
280
290
33
35
36
38
39
27
28
30
31
33
21
22
24
25
27
15
16
18
19
21.
WEEKLY PAYROLL -MARRIED
WAGES
ALLOWANCES
AT
LEAST
BUT LESS
THAN
0
1
2
3
190
195
200
210
220
195
200
210
220
230
19
19
21
22
24
12
13
14
16
17
6
7
8
10
11
0
1
2
3
5
230
240
250
260
270
240
250
260
270
280
25
27
28
30
31
19
20
22
23
25
13
14
16
17
19
6
8
9
11
12
7
ANSWERS………….
WEEKLY PAYROLL -SINGLE
1.How much is withheld
from the weekly wage of a
married person earning
$198 with 1 withholding
allowance? $13
2.How much is withheld
from the weekly wage of a
single person earning $234
with 2 allowances? $19
WAGES
ALLOWANCES
AT
LEAST
BUT LESS
THAN
0
1
2
3
195
200
210
220
230
200
210
220
230
240
26
27
29
30
32
20
21
22
24
25
14
15
16
18
19
7
9
10
12
13
240
250
260
270
280
250
260
270
280
290
33
35
36
38
39
27
28
30
31
33
21
22
24
25
27
15
16
18
19
21.
WEEKLY PAYROLL -MARRIED
WAGES
ALLOWANCES
AT
LEAST
BUT LESS
THAN
0
1
2
3
190
195
200
210
220
195
200
210
220
230
19
19
21
22
24
12
13
14
16
17
6
7
8
10
11
0
1
2
3
5
230
240
250
260
270
240
250
260
270
280
25
27
28
30
31
19
20
22
23
25
13
14
16
17
19
6
8
9
11
12
8
QUESTIONS???
COMPLETE P.100-101 #1-20 in your textbook.
9
PLEASE DO NOW………….
Write as decimals:
1. 9%
2. 4 ½%
3. 2 ¼%
4. 7.24%
10
ANSWERS………….
Write as decimals:
1. 9%
.09
2. 4 ½%
.045
3. 2 ¼%
.0225
4. 7.24%
.0724
11
12
13
14
15
2-2 HOW DO WE CALCULATE STATE INCOME TAX?
1.Most states require employers to withhold
a certain amount of your pay for state
income tax.
2.In some states, the tax withheld is a
percent of your taxable wages.
3.Your taxable wages depend on personal
exemptions, or withholding allowances.
Taxable Wages= Annual Gross Pay – Personal Exemptions
Annual Tax Withheld= Taxable Wages x Tax Rate
16
LET’s PRACTICE
John’s gross pay is $18,800 a year. The state income tax rate is 3% of
taxable wages. John takes a married exemption for himself and his
wife and 2 personal exemptions for his 2 children. How much is
withheld a year from his gross earnings for state income tax?
Solution:
Find the taxable wages.
Taxable Wages= Annual Gross Pay – Personal Exemptions
$18,800 - ($3,000 + $700 + $700) = $14,400
Find the annual tax withheld.
Annual Tax Withheld= Taxable Wages x Tax Rate
PERSONAL
EXEMPTIONS
Single---$1500
Married---$3000
Each Dependent---$700
$14,400 x 3% = $432 state income tax withheld
17
2-3 HOW DO WE CALCULATE GRADUATED STATE INCOME TAX?
1.Graduated income tax involves a different
tax rate for each of several levels of income.
2.The tax rate increases as income increases.
3.The tax rate on low incomes is usually 1%
to 3% and as much as 20% on high incomes.
Tax Withheld per Pay Period= Annual Tax Withheld/
Number of Pay Periods per Year
18
LET’s PRACTICE
Lou’s annual salary is $24,800. He is paid semimonthly.
His personal exemptions total $1500. How much does
his employer deduct from each of Lou’s semimonthly
paychecks for state income tax?
Solution:
Find the taxable wages.
$24,800 - $1500 = $23,300
Find the annual tax withheld.
STATE TAX
First $1,000: 1.5% of $1,000 = $15.00
Annual Gross Pay Tax Rate
Next $2,000: 3.0% of $2,000 = $60.00
First $1000
1.5%
Next $2000
3.0%
Next $2,000: 4.5% of $2,000 = $90.00
Next $2000
4.5%
Over $5,000: 5.0% of ($23,300 - $5,000) = $915.00
Over $5,000
5.0%
Total = $15 + $60 + $90 + $915 = $1,080
Find the tax withheld per pay period
$1,080/24 = $45.00 state income tax withheld semimonthly
19
QUESTIONS???
COMPLETE P.105-106 #1-21 in your textbook.
20
PLEASE DO NOW………….
Write the smaller amount:
1. $55,980 or $62,700
2. $64,100 or $62,700
Compute:
1. 7.65% of $600
2. 6.2% of $11,000
3. 1.45% of $27,500
21
ANSWERS………….
Write the smaller amount:
1. $55,980 or $62,700
$55,980
2. $64,100 or $62,700
$62,700
Compute:
1. 7.65% of $600
$45.90
2. 6.2% of $11,000
$682.00
3. 1.45% of $27,500
$398.75
22
2-4 HOW DO WE CALCULATE SOCIAL SECURITY &
MEDICARE TAXES?
1.The Federal Insurance Contributions Act
(FICA) requires employers to deduct 7.65%
of your income for social security and
medicare taxes.
2.Social security (6.2%) is deducted on the
first $62,700 of income, but medicare
(1.45%) is paid on all your earnings.
3.The employer must contribute an amount
that equals your contribution.
Tax Withheld= Gross Pay x Tax Rate
23
LET’s PRACTICE
Carl’s gross weekly pay is $232.00. His earnings to
date for the year total $11,136. What amount is
deducted from his pay this week for social security
taxes? For medicare taxes?
Solution:
His earnings to date are less than $62,700
Find the social security tax withheld
Gross Pay x Tax Rate
$232 x 6.2% = $14.38 social security tax
Find the medicare tax withheld
Gross Pay x Tax Rate
$232 x 1.45% = $3.36 medicare tax
24
QUESTIONS???
COMPLETE P.107 #1-21 in your textbook.
25
PLEASE DO NOW………….
Write as Decimals:
1. 80%
2. 75%
3. 78 ½%
4. $1100 x 70%
5. $580/12
6. $780 x 25%
26
ANSWERS………….
Write as Decimals:
1. 80%
0.80
2. 75%
0.75
3. 78 ½%
0.785
4. $1100 x 70%
$770
5. $580/12
$48.33
6. $780 x 25%
$195
27
2-5 HOW DO WE CALCULATE GROUP INSURANCE?
1.Many businesses offer group
insurance plans to their employees.
2.You can purchase group insurance for
a lower cost than individual
insurance.
3.Businesses often pay part of the cost
of the insurance.
Deduction per Pay Period=
Total Annual Amount Paid by
Employee/Number of Pay Periods per Year
28
LET’s PRACTICE
Nikki is a carpenter for Houck Construction Co. She has family medical coverage through
the group medical plan that Houck provides for its employees. The annual cost of Nikki’s
family membership is $4,200. The company pays 80% of the cost. How much is deducted
from her weekly paycheck for medical insurance?
Solution:
Find the percent paid by employee
100% - 80% = 20%
Find the total amount paid by employee
$4,200 x 20% = $840
Find the deduction per pay period
Deduction per Pay Period=
Total Annual Amount Paid by Employee/Number of Pay Periods per Year
$840/52 = $16.15 deducted per pay period
29
QUESTIONS???
COMPLETE P.109-110 #1-19 in your textbook.
30
PLEASE DO NOW………….
1. $28.91 + 17.79 + 9.18 =
2. $10.31 + 11.20 + 20.00 + 5.00 =
3. $456.78 - $56.19 =
4. $45.23 + $41.50 =
31
ANSWERS………….
1. $28.91 + 17.79 + 9.18 =
$55.88
2. $10.31 + 11.20 + 20.00 + 5.00 =
$46.51
3. $456.78 - $56.19 =
$400.59
4. $45.23 + $41.50 =
$86.73
32
2-6 HOW DO WE CALCULATE NET PAY FROM AN
EARNINGS STATEMENT?
The earnings statement attached to
your paycheck lists all your
deductions, your gross pay, and your
net pay for the pay period.
Net Pay= Gross Pay – Total Deductions
33
LET’s PRACTICE
Juan’s gross weekly salary is $400. He is married and claims 2
allowances. The social security tax is 6.2% of the first $62,700. The
medicare tax is 1.45% of gross pay. The state tax is 1.5% of gross pay.
Each week he pays $10.40 for medical insurance and $2.50 for charity. Is
Juan’s earnings statement correct? (Use P.643 in text for FIT)
Dept.
Employee
04
Check #
WEEK
ENDING
20566
4/16/04
Teijeiro,J.
TAX DEDUCTIONS
FIT
SOC.
SEC.
38.00
24.80
MEDICARE
5.80
STATE
6.00
LOCAL
------
NET PAY
312.50
PERSONAL DEDUCTIONS
MEDICAL
10.40
UNION DUES
-----
OTHERS
2.50
Solution: Find the total deductions
Federal Withholding: (From P.643)……………………..$38.00
Social Security: 6.2% of $400……………………………...24.80
Medicare: 1.45% of $400……………………………………5.80
State tax: 1.5% of $400…………………………………….....6.00
Medical insurance: …………………………………………10.40
Charity: ……………………………………………………….2.50
Net Pay is Gross Pay minus Total Deductions or $400 - $87.50 = $312.50
34
QUESTIONS???
COMPLETE P.111-113 #1-9 in your textbook.
35