Unit 2: Lesson 2
Nearly everyone who holds a job has taxes automatically
taken out of, or withheld, from their paychecks. No matter
what kind of job you have, your take-home pay will be
reduced by the amount of tax owed to the Internal Revenue
Service (IRS) and, in most cases, state government.
 As participants in the Finance Park program, students will
gain an understanding of taxes and how taxes will affect
their income and expenses.
 Students will determine their net monthly income (NMI)
using income tax, Social Security, and Medicare deductions.
 Students will learn about different kinds of taxes and will
understand how these taxes may affect how much money
they have available when preparing their budgets.
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FICA
 Federal Insurance Contributions Act, also known as
Social Security.
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Medicare
 A social insurance program that extends health
coverage to almost all Americans aged 65 and over.
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Social Security
 A federal retirement program in which the working
generation contributes to support retired workers,
survivors, and the disabled.
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Separate into groups.
Each group will receive a set of Tax Cards.
Without reviewing any resource information,
groups need to separate the cards into two
piles. One pile should contain all federally
supported programs, and the other pile
should contain state-supported programs.
Federally Supported Programs
State-Supported Programs
Social Security
Public Schools
Medicare
Local Libraries
Retirement Programs
Streetlights
Community Development
Programs (job, training,
education) Social Programs
Garbage Collection
Law Enforcement (CIA, FBI)
Police, Jails, Courts
Government Administration (IRS)
Local Parks & Recreation
Social Services
Firefighters
Elections
Mass Transportation
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
It has been said that taxes are what we pay to
have a civilized society. Taxes are needed to pay
for the services we have come to expect from
government. Many of these services are for
things most people could not afford individually,
such as an army or highway system.
A tax is required payment of money to local,
state, or federal government. Income tax, sales
tax, and property tax are the three main sources
of tax income.

An income tax is a tax on an individual’s earnings
from wages, salary, tips, interest, rents, capital
gains, and dividends. It is the largest sources of tax
revenue for the federal government. Federal
income tax usually is the largest single amount
withheld from workers’ paychecks. Each year on
and before April 15, American citizens calculate
what they owe in taxes and pay any amount due
(beyond what was withheld from their pay) or
refund (if they overpaid). The following are some
characteristics of the American income tax system:
 Federal income tax is based on one’s ability to
pay. This is called progressive taxation: The higher
a person’s income, the greater the percentage he
or she pays.
 The IRS relies on individual honesty and
responsibility for citizens to pay their income
taxes. This is called voluntary compliance.
 Income taxes are figured on a pay-as-you-earn
basis. As you receive income, you pay the
estimated tax owed. It is an employer’s
responsibility to withhold tax from your paycheck
and deposit it with the IRS.
 You, rather than the government, prepare and file
(send) your tax forms (tax return) each year,
determine your own tax liability, and pay any tax
due or request a refund. This is called selfassessment.

The federal government uses tax money to
pay for different programs to help the
country and its citizens. Examples of these
programs are:
 Social Security, Medicare, and other retirement
programs
 National defense, veterans, and foreign affairs
 Interest payments on the national debt
 Physical, human, and community development
programs (natural resource, environmental,
transportation, job training, and education programs)
 Social programs (Medicaid, food stamps, health
programs, unemployment compensation, assisted
housing)
 Law enforcement and government administration
(prisons, FBI, CIA, and the general costs of federal
government, including the collection of taxes)

Complete page 49, Income Tax, in the JA
Finance Park book

What is it?
 A proportion of one’s personal income paid to the
government. The largest source of revenue for
state and federal governments.
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Where does it come from?
 Individual workers and corporations
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Uses
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National Debt
National Defense
Social Programs
Law Enforcement
Veterans Affairs
Government Administration
How is it determined?
 A percentage of income or revenue

Sales taxes, those pennies or dollars added
to purchases, are a source of income for most
state governments. Each state decides its
own sales tax. Countries and cities also may
charge a sales tax. Some items are taxed, and
some are not. Items not taxed are taxexempt.
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Examples of taxed items may be:
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Household Items
Restaurant Food
Furniture
Gasoline
Utilities
Shoes and Clothing
Motel and Hotel Bills
Liquor
Tobacco Products
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Examples of nontaxable items may be:
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Groceries
Medicine
Medical Services
Insurance
Sales taxes provide income to state and local
governments, but they are criticized by some for
being regressive, meaning individuals or families
with low incomes may pay a greater percentage or
proportion of their incomes in sales taxes than do
families with higher incomes.

Complete page 48, Income Tax, in the JA
Finance Park book

What is it?
 A percentage tax imposed on the retail price of
most items. A source of income for governments.

Where does it come from? (Who pays it?)
 Consumers, both individuals and businesses
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Uses
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Human Services, Health Care
State and/or Local Government
Police, Jails, and Courts
Transportation
College, Schools, and Libraries
Parks and Recreation
Taxable Items
 Household items, restaurant food, furniture, gasoline

Non-Taxable Items
 Groceries, Medicine, Services, Insurance

Property Taxes are paid based on the value
of property – anything from private homes
and cars to commercial buildings and
factories. This property value is determined
by local governments. Property taxes often
are the primary source of local government
income.

Local and state governments use sales and
property tax revenues to pay for services and
facilities, such as the following:
 Public schools and local libraries
 Local roads and streets
 Streetlights
 Garbage collection, recycling
 Police, jails, and courts
 Local parks and recreation
 State employment services
 Social services
 Firefighters
 Elections
 Mass Transportation

Complete page 50, Income Tax, in the JA
Finance Park book

What is it?
 A tax paid to local government based on the value
of one’s property.

Where does it come from? (Who pays it?)
 Owners of homes, property, commercial
buildings, and factories
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Uses
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Human Services, Health Care
State and/or Local Government
Police, Jails, and Courts
Transportation
College, Schools, and Libraries
Parks and Recreation
How is it determined?
 Based on the value of the property
Bob Randall and Margaret Bratter have been working parttime at Handy Corner Convenience Store for more than a
year and are earning a good salary. They receive a paycheck
each week.
 One day, during an afternoon break, they discussed the
amount of their paychecks after taxes were deducted. Both
were surprised at the amount of money they actually had
left over to take home. They thought they would bring home
more than they did. Where did it all go?
 Complete the pay stubs. Use the information on each stub to
calculate the amount of the employee’s total check.
Complete the checks for the correct amount and answer the
questions.
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Employee Name: Bob Randall
Pay Period: April 22-29, 2009
Weekly Salary: $187.50
Federal tax withheld (one exemption):$18.08
Social Security tax withheld: $16.36
Medicare tax: $3.06
Total Deductions: $37.50
Net Pay (weekly salary minus total deductions):
 $150.00

What is the name of Bob’s Employer?
 Handy’s Corner Concenience Store

How much did Bob earn before taxes?
 $187.50

How much is Bob’s net (take home) pay?
 $150.00

Why was his net (take home) pay so much less
than he earned?
 Taxes were deducted.

List Bob’s deductions.
 Federal tax $18.08
 Social Security tax $16.36
 Medicare tax $3.06
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Employee Name: Margaret Bratter
Pay Period: April 22-29, 2009
Weekly Salary: $193.66
Federal tax withheld (one exemption):$18.87
Social Security tax withheld: $16.58
Medicare tax: $3.18
Total Deductions: $38.63
Net Pay (weekly salary minus total deductions):
 $155.03

How much did Margaret earn before taxes?
 $193.66
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How much is Margaret’s net (take-home) pay?
 $155.03

List Margaret’s deductions.
 Federal tax $18.87
 Social Security tax $16.58
 Medicare tax $3.18
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
All but a handful of states have a sales tax. Each
state determines its own tax rate, which can run
from 0 to 9.25%. The following receipts are from a
state where the sales tax is 6%, and there is an
additional county tax of 1%. In this county,
consumers pay a total of 7% in sales tax. As in many
states, nonfood items are taxable, but food and
drugs are not taxable (tax exempt). Sales tax is
charged only on taxable items.
Examine the two sample sales receipts. Compute
the sales tax and final cost for the items found at
the bottom of the page.
Taxable Items
Nontaxable (exempt) Items
Diapers
$7.99
Bread
$1.09
Toothpaste
$1.99
Can tomato soup
$0.69
Deodorant
$2.29
1 gal. ice cream
$2.50
Beach ball
$4.39
Oranges
$5.29
Camera film
$2.75
Ground beef
$6.39
Window cleaner
$2.19
Frozen pizza
$3.99
Spiral notebook
$1.99
Apple juice
$0.99
Subtotal
$23.59
Subtotal
Sales Tax
Total
$1.65
$25.24
Sales Tax
Total
$20.94
$0.00
$20.94

To compute sales tax:
 Convert the percent (%) to a decimal.
▪ Example: 7% = .07
 Multiply the subtotal by .07.
▪ Example: $23.59 x .07 = $1.65
 Add the computed sales tax to the subtotal for the
total that the consumer pays.
▪ Example: $23.59 + $1.65 = $25.24

Deodorant
 Price = $2.29
 7% sales tax = $0.16
 Final Price = $2.45
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Window Cleaner
 Price = $2.19
 7% sales tax = $0.15
 Final Price = $2.34
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Camera Film
 Price = $2.75
 7% sales tax = $0.19
 Final Price = $2.94
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Diapers
 Price = $7.99
 7% sales tax = $0.56
 Final Price = $8.55
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Spiral notebook
 Price = $2.75
 7% sales tax = $0.14
 Final Price = $2.13

What is 7% sales tax on a car that costs $8,099.00?
 $566.93
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What is the total cost of this car (including sales
tax)?
 $8,665.93
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
Using the information provided, calculate
each person’s net monthly income (NMI).
Remember, GAI is gross annual income, and
GMI is gross monthly income.

1. )Stephanie graduated from college and on
her first job earned an annual salary of $25,000.
GAI
GMI (GAI divided by 12)
$25,000.00
$2,083.33
Monthly Federal Income Tax
$259.00
Monthly Social Security Tax
$132.00
Monthly Medicare
TOTAL MONTHLY DEDUCTIONS
Stephanie's NMI = (GMI minus deductions)
$26.00
$417.00
$1,666.33

2. ) Darren was able to land a job at the town
recreation center after school and on weekends.
He will make $2,700 if he works the entire year.
GAI
GMI (GAI divided by 12)
$2,700.00
$225.00
Monthly Federal Income Tax
$23.00
Monthly Social Security Tax
$18.00
Monthly Medicare
TOTAL MONTHLY DEDUCTIONS
Darren's NMI = (GMI minus deductions)
$4.00
$45.00
$180.00
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3. ) Jeremy is working his way through college
with two jobs. He will earn $13,000 a year if he
continues to work both jobs.
GAI
GMI (GAI divided by 12)
$13,000.00
$1,083.33
Monthly Federal Income Tax
$129.00
Monthly Social Security Tax
$67.00
Monthly Medicare
$16.00
TOTAL MONTHLY DEDUCTIONS
$212.00
Jeremy's NMI = (GMI minus deductions)
$871.33

Complete the rest of the NMI Calculation
Practice page. There is a total of eight.

Social Security is a social insurance system
created to provide economic security for
Americans who are retired, sick, or too
disabled to work, as well as for the families of
workers who have died. Workers are required
to participate. Benefits are based on past
work. The Social Security Administration,
which runs the program, is a branch of the
federal government with an office in nearly
every community.

Benefits: People are entitled to Social Security
payments or benefits if they or someone in their
family contributed part of their earnings as
workers. The benefits have expanded over the
years to include unemployment insurance, oldage assistance, aid to dependent children, and
grants to the states to provide various medical
care and assistance. Benefits are weighted in
favor of low-income workers and families.
About one of every six Americans receives
Social Security benefits.

Medicare: Since the Medicare bill was signed in
1965, the Social Security Administration
became responsible for this social insurance
program. Medicare covers health expenses for
almost all Americans age 65 and older.

Social Security is funded primarily through a payroll
tax on workers and their employers. This tax appears
as FICA (Federal Insurance Contributions Act) on a
paycheck. Social Security taxes paid by today’s
workers are used to pay benefits to tomorrow’s
beneficiaries. Social Security funds are invested in
special trust funds, and the earnings on the
investments are used to pay benefits. Over the years,
more than $4.5 trillion has been paid into trust funds,
and more than $4.1 trillion has been paid out in
benefits. The remainder is currently on reserve in the
trust funds and will be used to pay future benefits.

A Social Security number is used by the government to
keep track of you and your earnings throughout your
lifetime. When someone applies for Social Security benefits,
the Social Security Administration assigns a number – which
never changes throughout an individual’s lifetime – and uses
this number to tell if an individual is eligible for benefits and
how much he or she is entitled to. Your parents need your
Social Security number when they claim you as one of their
dependents on their income tax return. Today, most parents
apply for a child’s Social Security number at the hospital
when that child is born. This Social Security number, which
every worker must have, is printed on a Social Security card.

Do you have a Social Security card? If you do not
have a card, you can call your Social Security office
to request an application. You also can complete
the application process via the Internet at
www.ssa.gov/kids/card.htm

Keep your Social Security number and card in a safe
place to prevent theft. It is not necessary to carry your
Social Security card with you. In fact, it is
recommended that you don’t carry it with you. You will
need to show your card to your employer when you
start a job, or give your Social Security number to the
bank to apply for a loan. When you show somebody
your card or give out your Social Security number,
make sure you know why your number is needed and
how your number will be used. It’s important to be
careful with your Social Security number to prevent
their misuse.

What is Social Security?
 Social Security is a social insurance system operated by
the federal government to pay people who are retired,
sick, or too disabled to work, as well as the families of
workers who have died.

What is the primary goal of Social Security?
 The goal of Social Security is to provide economic
security for Americans when they are not able to work.

Who pays for Social Security?
 Workers and their employers pay for Social Security
through payroll tax.

What is another name for Social Security?
 The Federal Insurance Contributions Act, or FCIA, is
another name for Social Security.

What happens to the money between the time a
worker pays into a trust fund and the time when he
or she collects benefits from that fund?
 The money is invested, and the earnings on the
investments are used to help pay benefits.

What is the purpose of a Social Security number?
 A Social Security number is used by the government to keep
track of people and their earning throughout their lifetime. It
is also used by the government to identify people for tax
purposes.

When and how do you expect Social Security to be
beneficial to you?
 Social Security may be beneficial to me as a source of regular
income after retirement. The benefits also might be used of I
become disabled or too sick to work prior to retirement age.

What is Medicare?
 Medicare is a social insurance program operated by the
Social Security Administration that extends health coverage
to almost all Americans age 65 or older.

Complete the rest of the Word Map on page
59 by writing a brief sentence or drawing a
picture showing your understanding of the
terms.