Chapter 2 – Net Pay



Chapter 2 – Net Pay

This is your paycheck…

Net – this is any amount left over after taking out deductions.

2-1 Deductions from Gross Pay

Deductions – subtractions from gross pay

1. Federal Withholding Tax Deductions also known as income tax…

Based on:

a. Marital status

b. Number of exemptions

c. Income level

Look on page 42…compare amt of taxes if you are married and make $454 per week and have 1 deductions versus 6 deductions..

2. Social Security and Medicare Tax Deductions

The tax for Social Security is part of the Federal Insurance Contributions Act and is also called the FICA tax. (This is calculated on a percentage of your wages, but has a maximum limit.) It includes:

a. Disability - benefits for workers who are disabled and unable to work

b. Medicare - which provides hospital insurance for some disabled people and for people over 65

c. Retirement - benefits for people who are at least 62

d. Survivor’s benefits - which are paid to spouses and dependent children when a Social Security recipient dies.

• If a person earns more than $102,000.00 a year from one job, the employer does not deduct Social Security tax after the wages exceed $102,000. If a person earns more than $102,000 a year from several jobs, each employer withholds 6.2% Social Security tax to the maximum $102,000 earning limit. The taxpayer must apply for a return of the overpayments when a federal income tax return is filed.

Example:

Find the total FICA tax on incomes of $35,000, $80,000 and $104,000.

|Income |Social Security 6.2% |Medicare |Total FICA |

| | |1.45% |7.65% |

|$35,000 |$ 2,170.00 |$ 507.50 |$ 2,677.50 |

|$80,000 |$ 4,960.00 |$ 1,160.00 |$ 6,120.00 |

|$104,000 |$ 6,324.00 |$ 1,508.00 |$ 7,832.00 |

3. Total Deductions and Net Pay

In addition to income tax (withholding), Social Security, and Medicare taxes, other deductions may also be subtracted from gross pay, such as union dues, health and life insurance and government bonds. After all deduction are subtracted from total wages or gross pay, an amount remains that is called net pay or take home pay.

Net Pay = Gross Pay – Deductions

Page 46 #36 – 44 Answers: ( 9 points)

36. $104.34

37. $473.66

38. $540

39. $539.40

40. $390.60

41. $1,513.80

42. $0.00

43. $651.00

44. ,827

2-2 Federal Income Taxes

1. Adjusted Gross Income and Taxable Income

Withholding Tax – money deducted from a person’s pay by employers…this is based on an estimate of taxes owed at year’s end.

Federal Income Tax Return – reports submitted at years end…it states how much income tax you paid and how much you should have paid.

Gross Income - includes money earned all year from all of the following:

o wages

o salaries

o commission

o bonuses

o tips

o interest

o dividends

o prizes

o pensions and all others

Adjustments – these are items of money that you have paid out…such as:

• Business losses,

• Payments to approved retirement plans

• Alimony

• Certain penalties

The amount left after subtracting adjustments is called the adjusted gross income.

Gross Income…ALL money earned

- Adjustments…(retirement payments, losses. alimony, penalties)

= Adjusted Gross Income

- Deductions….which ever is more…itemized expenses OR standard deduction

- Exemptions….usually $3,500 per person/dependent

= Taxable Income

Deductions – expenses that reduces the amount of your taxable income…such as mortgages, property taxes, state and local income taxes, medical/dental expenses, losses and contributions to charities….You may claim a fixed amount called a standard deduction, or if your deductions are more than the standard deduction, you list all your deductions on your tax return under itemized deductions.

The standard deduction is:

Single - $5,450

Married - $10,900

From Gross income, you may be able to subtract deductions and exemptions for which you qualify. The result is your taxable income. Taxable income - the income on which you actually pay tax.

Taxable Income = Adjusted Gross Income – Deductions and

Exemptions.

Exemptions – an amount of income per person that is free from tax….you can claim yourself, spouse, children and dependent parents.

Exemptions are $3,500 per person.

2. Income Tax Due – use the tables to find a person owes.

3. Income Tax Refunds for Single Dependents – many young people are listed as dependents on someone else’s income tax even thought they are employed. They are required to pay income taxes on their earnings even thought the tax they actually owe is usually very low.

Gross Income:

- Business losses,

- Payments to approved retirement plans

- Alimony

- Certain penalties

= Adjusted Gross Income

- Deductions such as:

- Medical expenses

- Interest paid on a mortgage

- Property taxes

- State and local income taxes

- Theft losses

- Contributions to charity

- Exemptions of $3,500 per person

= Taxable Income…this is the amount you should be paying taxes on (the lower, the better)

Homework – do pages 15-17 due tomorrow

2-3 State and City Income Taxes

1. State and City Flat Income Taxes

Some states and cities tax personal income as a percent of federal taxable income, however, they use a flat tax…where no matter what income you are at, everyone pays the same percentage.

Is this a good or bad idea?

To solve, just multiply your income by the stated percentage.

Allison Green has taxable income to be $45,300. She pays a state income tax rate of 3% on her federal taxable income. Find her state income tax.

… $45,300 x .03 or 3% = $1,359

Go to Page 55 in your textbook…

A. $511.50

B. $1,136.20

2. State and City Graduated Income Taxes

Some state and cities use a graduated income tax rate like the federal government, where the more money you make the higher percent income tax you pay.

Look at the table on the bottom of page 55….

2-4 Benefits and Job Expenses

Fringe Benefits – items given to an employee in addition to his/her pay or salary

• Health care

• Dental

• Insurance

• Pensions

• Holiday pay

• Sick days

• Vacations

• Parking

• Car Allowance

• Discounts for purchases of products

• Health clubs

• Spa/country club membership

• Child care

• Education

•

Expenses:

• Parking

• Gas

• Tolls

• Required memberships

Typically, fringe benefits are worth as much as 15% to 40% of the amount paid in wages. When you are considering a job offer, the value of the fringe benefits should be added to the amount of wages to find the total job benefits.

Finding total job benefits….

Gross Pay + Fringe Benefits = Total Job Benefits

(Some fringe benefits can be figured very accurately, however, others must be estimated.)

Calculating Job Expenses….

Job expenses are those items that the employee must pay for in order to work there.

What are some job expenses?

• travel

• license or license renewals

• professional dues

• commuting expenses

• uniforms

• tools

• parking

Calculating Net Job Benefits…

To find net job benefits, subtract total job expenses from total job benefits.

Total Job Benefits – Job Expenses = Net Job Benefits

****Then you can make a better decision on which job to take…

2-5 Analyze Take-Home Pay

1. Take-Home Pay as a percentage of Gross Pay

To calculate….figure take-home and divide by gross..is

of

(you take your “is” number and divide it by your “of” number)

2. Evaluating the impact of a Raise…remember when you get a raise, you need to account for possibly income tax and higher FICA taken out of pay.

3. Pre-Tax Deductions…sometimes a person may have money taken out “pre-tax” and put into an account to use at a later date…this money is subtracted from your gross pay and then proper taxes would apply to the remainder. (You will be taxed on this money at the time of using it)

Look at page 65 in your textbook

-----------------------

FICA…made up of:

• SS

• Medicare

Income

Tax:

Based on:

• $

• Marital Status and

• Dependents

Take Home Pay

•

“Ability to Pay” Theory

Together this makes up FICA at 7.65% of wages

• Social Security tax is 6.2% and applies to a max of $102,000.00

• Medicare tax is 1.45% and applies to all wages.

All of this added together is called Gross Income

You MUST know how to calculate this

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download