Income Tax
Applied Business Practice
Taxes and Your Paycheck
 Income Taxes
 Taxes you pay on most types of income
 Not a fixed percentage
 Dependent on financial and family situation
 You are responsible for calculating the
taxes you owe
Taxes and Your Paycheck
 FICA
 Federal Insurance Contributions Act
 Social Security and Medicare
 Withholding
 Deducting money from your wages to
collect payroll taxes
 How does withholding benefit you?
 It spreads tax payment over time, to
avoid one huge payment
Warm-Up
 Why is it required for workers to pay
income tax?
Taxes and Your Paycheck
 Gross Income
 Amount you earn before taxes are
withheld
 Net Income
 Amount you receive after withholdings
are deducted from your gross pay.
PAYCHECK STUB
ABC Company
144 E. Central Ave.
Hometown, ST 32122
Check No
Employee Name:
Jane Smith
Employee Address: 986 Park St.
Hometown, ST 32122
Check Date: 07/22/05
Earnings
0556789
Employee Social
Security Number: 433-211-1234
Pay Period Ending:07/22/05
Hours:
Rate:
20
6.25
$
Gross Pay
$125.00
Deductions
Federal Income Tax
Social Security Tax
Medicare Tax
State Tax
$18.75
$ 7.75
$ 1.81
$ .50
Total Withholding
$28.81
Gross Pay
Total Deductions
$125.00
$ 28.82
Net Pay
$ 96.19
Taxes and Your Paycheck
 Form W-4
 Provides the information of the amount
to withhold from your paycheck.
 Completed by the Employee
 IRS
 Internal Revenue Service
 Federal agency that collects income taxes
Taxes and Your Paycheck
 Allowances
 Number that reduces the amount of
money withheld from your pay
 Larger number of allowances, smaller
amount withheld
Warm-Up
 Should you reduce your allowances
(on your W-4) to force yourself to
save? Why or why not?
Warm-up
1. How do you and other taxpayers
benefit from the taxes you pay?
2. What is the purpose of Form W-4?
3. What is an allowance on form W-4?
4. What is your main goal in
determining how many allowances to
claim?
A Bit of History
 What amendment established the
current income tax system?
 16
 When was this amendment ratified?
 Feb 3, 1913
 Why was it necessary to make this
part of the constitution?
Taxes and Your Paycheck
 Withholding too much
 Students who work part-time during
school, but full time during summer may
have more withheld
 Results in a refund
 Withholding too little
 Results in a tax bill
 May need to lower your allowances
Taxes and Your Paycheck
 Overwithholding as a way to save
 Force a savings plan
 Claiming too few allowanced guarantees
a refund
 Is this a good savings plan?
 It is not a good savings plan because
the government does not pay interest
File a Tax Return
 Tax Return
 Set of forms used by taxpayers to calculate tax
obligation
 Minimum Income to file a return
 If you worked and had Federal income taxes
taken out – file
 If you are self employed and earned $400 - file
 Filing must be in by
 April 15th every year!
File a Tax Return
 Income




Wages
Tips
Earned Interest
Cash earned for jobs
File a Tax Return
 Form W-2
 Summary of your earnings and
withholdings for the year for a job
 Must send in a copy with your W-2
 Employer sends a copy to IRS
a Control Number
2233
void
For office use only ►
OMB No. 1234-0001
b Employer Identification number
1. Wages, Tips, other
compensation
78-65412
2. Federal Income Tax Withheld
5,001.88
c Employers name, address and zip code
ABC Company
144 E. Central Ave.
Hometown, ST 32122
975.00
3. Social security
wages and tips
4. Social Security Tax Withheld
5. Medicare wages
and tips
6. Medicare Tax Withheld
7. Social Security Tips
8. Allocated Tips
5,001.88
403.00
5,001.88
d Employee’s Social Security Number
433-211-1234
94.12
9. Advanced EIC payment
e Employees Name (first, middle initial, last)
Jane Smith
986 Park St.
Hometown, ST 32122
F Employee’ address and ZIP code
16
State
ST
Employer’s State ID no.
78-65412
10. Dependent Care Benefits
11 Non-Qualified Plans
12. Benefits included in box 1
13. See instrs. for box 13
14. Other
15 statutory
employee
deceased
17 State Wages, tips, etc
5001.88
pension
plan
legal
rep.
18 State income tax
26.00
deferred
compensation
File a Tax Return
 Form 1099-INT
 Statement of interest your bank paid on
your savings that year
 Banks send this information to the IRS
Income Tax Forms
 1040 EZ
 Simplest of the tax forms
 To Qualify to use the EZ form:
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No dependents
You and spouse under age 65
No blindness
Income less than $50,000
Earned no more than $400 in interest
No income other than wages, interest, tips,
scholarships, or unemployment compensation
Warm-Up
 Why would the IRS require you to
send a copy of your W-2 with your
tax return when you file your taxes?
Filling Out the 1040 EZ
 Identifying yourself
 Social Security Number
 Unique number used to identify you
throughout your entire life
a Control Number
2233
void
For office use only ►
OMB No. 1234-0001
b Employer Identification number
1. Wages, Tips, other
compensation
78-65412
2. Federal Income Tax Withheld
5,001.88
c Employers name, address and zip code
ABC Company
144 E. Central Ave.
Hometown, ST 32122
975.00
3. Social security
wages and tips
4. Social Security Tax Withheld
5. Medicare wages
and tips
6. Medicare Tax Withheld
7. Social Security Tips
8. Allocated Tips
5,001.88
403.00
5,001.88
d Employee’s Social Security Number
433-211-1234
94.12
9. Advanced EIC payment
e Employees Name (first, middle initial, last)
Jane Smith
986 Park St.
Hometown, ST 32122
F Employee’ address and ZIP code
16
State
ST
Employer’s State ID no.
78-65412
10. Dependent Care Benefits
11 Non-Qualified Plans
12. Benefits included in box 1
13. See instrs. for box 13
14. Other
15 statutory
employee
deceased
17 State Wages, tips, etc
5001.88
pension
plan
legal
rep.
18 State income tax
26.00
deferred
compensation
Income Tax Forms
 Form 1040
 More complex form
 Deductions
 Expenses you can legally subtract from
your income when figuring your taxes.

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Own a home
Children
Run a small business
Stocks
 Dependent
 Someone you financially support
File a Return
 Refund
 When your withholding is more than the
taxes owed (Government pays you the
overage amount paid)
 Amount You Owe
 When your withholding is less than the
taxes owed (you pay the remaining
amount due)
Taxes and Government
 Sources of Federal Government
Income
 Personal Income Tax
 Social Security, Medicare,
Unemployment, & Other Retirement Tax
 Borrowing
 Corporate Income Tax
 Excise, Custom, Estate, Gift, & Misc. Tax
Sources of Fed. Gov’t. Income
Social Sec., Medicare,
Unemployment, other retirement tax
33%
42%
Personal Income Tax
Taxes and The Government
 Where does the government get its
money?
 42% Personal Income Taxes
 33% Social Security Taxes, Medicare,
and unemployment taxes
 Who contributes to pay Medicare and
Social Security?
 Employees (pays a max of 7.65%)
 Employers (pays a max of 7.65%)
Warm-Up
 Why should you check your work
before filing your tax return?
Principles of Taxation
 Benefit Principle
 Those who use a good or service
provided by the government should pay
for it
 Example: toll roads
 Ability to Pay Principle
 Those who have larger incomes should
pay a larger share of what they receive
 As your income increases your rate of tax
increases from 15 – 39.9%
How Taxes Are Collected
 Direct Taxes
 Paid directly to the government
 Examples: income, property
 Indirect Taxes
 Taxes you pay that are included in the
cost of a good/service
 Examples: Hair care services
How Taxes Are Collected
 Pay-As-You-Earn Tax
 Taxes paid as you earn income
 Example: withholdings on your paycheck
Types of Taxes
 Sales Tax
 Taxes added to the price of goods and
services
 Property Tax
 Taxes on the value of real estate
property
Types of Taxes
 Excise Tax
 Collected on sale of specific goods or
services
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Tobacco
Gas
Alcohol
Oil
Firearms
Air travel
Types of Taxes
 Estate Taxes
 Taxes on property received when
someone dies (value must exceed $2.5
million)
 Gift Tax
 Paid for by the giver of gifts that exceed
$12,000 (for 2008)
Types of Taxes
 Business (License) Tax
 Tax paid for certification
 May be accompanied by a test
Warm-up
 Gross Pay = $800
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Federal Tax = 14%
State Tax = 4.5%
Social Sec. = 6.2%
Medicare = 1.6%
 What is the total Withholdings?
 What is the Net Pay?
Government Spending
 Sin Taxes
 Taxes on items that can be harmful to
your health
 Tobacco
 Alcohol
How you can reduce tax obligation
 # 1 way to lower taxes
 Give to charities
Government Spending
 Federal Government Spends on:
 Social Security, Medicare, other
retirement
 National Defense, veterans, foreign
affairs
 Social Programs
 Interest on Debt
 Community Development
Government Spending
 State and Local government spends
on:
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Buildings and roads
Police, Fire protection services
Criminal Justice system
Schools
Colleges, University
Sewage treatment plants
Unemployment compensation plans