Chapter 2
Income Sources
Copyright 2007 Thomson South-Western
Types of Earned Income
• Wages
– Minimum wage
– Overtime pay
• Salaries
• Tips and commissions
Some workers make most
of their earnings from tips
rather than wages.
2-1 Earned Income and Benefits
Slide 2
Self-Employment
• An entrepreneur takes the risks of being selfemployed or owning a business
• Advantages
– You can make decisions about how to work or run
the business
– You can keep profits from your work or the
business
• Disadvantages
– Involves high risk
– Often requires long work hours
2-1 Earned Income and Benefits
Slide 3
Employee Benefits
• Forms of pay other than wages or salary
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Pay without work
Educational reimbursement
Perks
Insurance
Retirement plans
Profit-sharing and stock option plans
Health flexible spending arrangements
2-1 Earned Income and Benefits
Slide 4
Unearned Income
• Is money received from sources other
than working in a job
• Is taxable
• Comes from private and government
sources
– Examples from private sources: dividends
and interest
2-2 Unearned Income
Slide 5
Classification of Types of Income
Earned Income
Unearned Income
Variable Income
Salaries and wages
Dividends
Business profits
Commissions
Interest
Royalties
Bonuses
Capital gains
Rents
Professional fees
Gambling winnings
Tips
Alimony
Social Security
benefits
Pensions
Annuities
Source: Internal Revenue Service, http://www.irs.gov/businesses/small/international/article/0,,id=96811,00.html
(accessed March 6, 2006).
2-2 Unearned Income
Slide 6
Government Transfer Payments
• Money and benefits received from local,
state, or federal governments
• In-kind transfer payments
– Examples: food stamps, rent subsidies, and
Medicaid services
• In-cash transfer payments
– Examples: checks, debit cards, or other direct
payments
2-2 Unearned Income
Slide 7
Taxes
• Are required payments to a government
• Are collected from many sources
– Examples: income taxes, use taxes, and
excise taxes
• Are paid on earned and unearned
income
2-2 Unearned Income
Slide 8
Costs of Paying Taxes
• Paying taxes reduces disposable
income
• Less money is left to spend or save
• Lower spending may affect the economy
2-2 Unearned Income
Slide 9
Benefits of Paying Taxes
• Taxes benefit taxpayers
– Example: Social Security tax provides retirement
benefits to workers
• Taxes benefit all residents
– Examples: Highways, parks, government transfer
payments
Taxes help provide parks
for everyone to enjoy.
2-2 Unearned Income
Slide 10
Focus on...
Social Security Benefits
• Workers pay into the Social Security
fund and receive a statement each year
• Payments are matched by employers
• The worker receives monthly benefit
checks when retired
2-2 Unearned Income
Slide 11
Social Security Tax
• Is withheld by the federal government
• Provides a system of old-age, survivors,
and disability insurance
• Requires employers to verify that workers
are eligible for employment
• Requires workers to complete parts of
Form I-9, Employment Eligibility
Verification
2-3 Taxes and Other Deductions
Slide 12
Taxes and Disposable Income
• Wages, salaries, and business profits are
taxable
• Some unearned income is taxable
• Lower taxes result in higher disposable
income
• Higher taxes result in lower disposable
income
2-3 Taxes and Other Deductions
Slide 13
Required Deductions
• Money withheld from a worker’s
paycheck
– Examples: income tax, Social Security tax, and
Medicare tax
• Gross pay minus taxes and other
deductions equals net pay
2-3 Taxes and Other Deductions
Slide 14
Sample Paycheck Stub
2-3 Taxes and Other Deductions
Slide 15
Income Taxes
• Are withheld according to income amount
and exemptions claimed on Form W-4
2-3 Taxes and Other Deductions
Slide 16
Medicare Tax
• Is withheld by the federal government
• Pays for medical care for retired persons
and those who receive Social Security
benefits
• Is paid by workers and employers
2-3 Taxes and Other Deductions
Slide 17
Workers’ Compensation
• An insurance plan
• Pays medical and disability benefits to
workers who are injured or
contract diseases on the job
• Laws and programs vary by
state
• Premiums are paid primarily
by employers
2-3 Taxes and Other Deductions
Slide 18
Optional Deductions
• Payments for items other than taxes that
are subtracted from a worker’s pay
– Examples: health insurance, vision
insurance, savings plan,
and retirement plan
Retirement plans allow many retired
workers to live comfortably.
2-3 Taxes and Other Deductions
Slide 19
Federal Tax Filing
• Whether U.S. citizens must file a federal
income tax return depends upon
– Gross income
– Filing status
– Age
– Whether you are a dependent
2-3 Taxes and Other Deductions
Slide 20
Tax Forms
Form W-2
Used to report the taxable income a worker
received during the calendar year
Form 1040EZ
Designed for use in filing income taxes by single
and joint filers with no dependents
Form 1040A
A two-page form designed for use in filing
income taxes
Allows more options for income and deductions
to be entered
Form 1099-INT
Shows the interest income earned during the
year at one bank
2-3 Taxes and Other Deductions
Slide 21