How does your employer know how much to take out of your paycheck for deductions?

Take-Home Pay

The deductions taken out of your paycheck help support schools, roads, national parks, and more.

Why do you have to pay taxes?

Deductions – Memorize these

• 1.0% - Local• 7.65%- Total Social Security and Medicare• 6.2% - Social Security Normally• 4.2% - Social Security currently (until January 1, 2013)• 1.45%- Medicare• 3.07% - PA State Tax• .08%- PA Unemployment Tax

• Why isn’t Federal listed? Base on three things (W-4 form) Employees withholding allowance certificate.

• Marital Status, Earnings, Allowances you claim

Take heart, America. Even celebrities pay taxes on April 15.

Well, sometimes.

Nicolas Cage’s bookkeeping got a bit muddled, and now he has to shell out $13.3 million to the federal government.

Joe Francis, founder of “Girls Gone Wild,” forgot, too. His tab? $29.4 million -- or roughly 5 million margaritas.

Sinbad the Comedian? A very unfunny $8.15 million, which doesn't even include interest and legal fees.

Other celebs who owe the taxman big bucks are Pamela Anderson ($1.7 million), the rapper Nas ($3.4 million), singer Dionne Warwick ($2.2 million) and actor Terrence Howard ($1.1 million). (Click here to see some of the celebs on the IRS’ hit list)Celebrity Tax Evaders Hit List

Tax Rate Single Married Filing Joint Head of Household10% Up to $8,600 Up to $17,200 Up to $12,25015% $8,601 – $34,900 $17,201 – $69,800 $12,251 – $46,75025% $34,901 – $84,500 $69,801 – $140,850 $46,751 – $120,700

28% $84,501 – $195,950 $140,851 – $237,700

$120,701 – $216,800

36% $195,951 – $383,350

$237,701 – $383,350

$216,801 – $383,350

39.6% Over $383,350 Over $383,350 Over $383,350

Formula• Gross Income - Deductions = Net Income (take home pay)

• Mandatory:– Federal – FIT (W-4: marital status, amount of income, exemptions)– PA state – 3.07% (.0307)– Local – 1.0% (.01)– Social Security – normally, 6.2% (.062) (first $110,100), currently 4.2%

(.042) for employees.– Medicare – 1.45% (.0145)– PA Unemployment Tax - .08% (.0008)

• Voluntary:– Medical, savings, investing, scholarship, etc.

Starting a New Job

To receive a paycheck, an employee must:– Complete a Form W-4

• Employee’s Withholding Allowance Certificate

– Complete a Form I-9• Employment Eligibility Verification

Personal exemptions in dollar amounts

• 2012: $3,800• 2011: $3,700

2010: $3,6502009: $3,6502008: $3,5002007: $3,4002006: $3,300

• Dependents• Yourself• Spouse• Blood relatives• Donations • Mortgage interest• Etc.

Form W-4

• Employee’s Withholding Allowance Certificate– Determines the percentage of gross pay which will be withheld for taxes

• Withholding Allowances– The number of people an employee supports.– Used to determine the amount of federal taxes withheld from the

paycheck– The more allowances you claim on Form W-4, the less income

tax your employer will withhold. You will have the most tax withheld if you claim “0” allowances.

• Dependent – a person who relies on the taxpayer for financial support

2012 W-4 Form

Steps to Completing a Form W-4

1. Print or type legal name on Line 1 and home address directly below the name

2. Write Social Security number on Line 2

3. On Line 3, check the appropriate box to indicate marital status

4. Complete the “Personal Allowances Worksheet” above the form (A-H)

5. Enter a one or a zero on Line 5

6. Can you claim exempt on Line 7? See “Exemption from Withholding” handout.

Steps to Completing a Form W-4 continued

7. Sign name and date the form before giving it to the employer

8. Keep a copy for personal records

Remember: The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld (deducted) if you claim “0” allowances.

**Exempt,….. 6, 5, 4, 3, 2, 1, 0 ( moving left to right, more money will be deducted, from zero to maximum)

** no federal taxes in last year, less than $5700 earned and $300 unearned income

Form I-9 (copy attached to W-4)

Employment Eligibility Verification Form• Used to verify the eligibility of individuals to avoid hiring

undocumented workers or others who are not eligible to work in the United States

• Must provide documentation which establishes identity and employment eligibility– Examples include driver’s license, passport,

Social Security card, and birth certificate

Who’s responsible for all this?????

Answer: President Abe Lincoln

Paying Employees

Three common methods employers may use to

pay employees:

1. Paycheck- • Employee responsible for handling the paycheck• Immediately see payroll stub and deductions

Paying Employees continued

2. Direct Deposit-• Employers directly deposit employee’s paycheck

into the authorized employee’s depository institution account

• Employee receives the paycheck stub detailing the paycheck deductions

• Most secure because there is no direct handling of the check

• Employee knows exactly when paycheck will be deposited and available

Paying Employees continued

3. Payroll Card-• A payroll card electronically carries the balance

of the employee’s net pay• Funds are directly deposited by an employer into

an account at a depository institution that is linked to the payroll card

• Use the payroll card for ATM withdrawals or to make purchases

Paycheck Stub

Do you understand everything you see on your paycheck stub?

Paycheck Stub

Paycheck Stub– A document included each pay period which outlines paycheck deductions

On-The-Go

EmployeeBeakens, Joe

SSN201-92-4856

Check #164

Check Amount$1,102.98

Employee Address293 Michael GroveBillings, MT 59102

 

  Pay Type-Gross Pay

Deductions Current Year-to-date

 $1,353.33 Federal WithholdingState WithholdingFed OASDI/EE or Social SecurityFed MED/EE or MedicareMedical401K

$106.00$40.82$83.91$19.62$0.00$0.00

$503.46$117.72$636.00$244.92$0.00$0.00

  Totals $250.35 $1,502.10

Pay Period 6/11/2009-7/11/2009

Personal Information

Personal Information– States the employee’s full name, address, and Social Security number– Always check to ensure this information is correct

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Pay Period

Pay Period– The length of time for which an employee’s wages are calculated; most

are weekly, bi-weekly, twice a month, or monthly– The last day of the pay period is not always your payday to allow a

business to accurately compute wages

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Deductions

Deductions– The amount of money subtracted from the gross pay earned for

mandatory systematic taxes, employee sponsored medical benefits, and/or retirement benefits

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Lesson Objective Determine the amount withheld for federal income tax.

Who collects the taxes?

Taxes

• Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces tax laws written by the United States Congress.

  1992

1993 - 2000

  2001

  2002

  2003 - 2009

  2011

15% 15% 15%

10% 10% 10%

15% 15% 15%

28% 28% 27.5% 27% 25% 25%

31%31% 30.5% 30% 28% 28%

36% 35.5% 35% 33% 33%

39.6% 39.1% 38.6% 35% 35%

Your tax bracket depends on your income and your filing status. 1993 saw a tax hike on the wealthy (via two new brackets), and then 2001 through 2003 saw a series of tax cuts that lowered some of the tax brackets.

Federal Tax Brackets

If Taxable Income Is: The Tax Is:

over $8,500 10% of the taxable income

Over $8,500 but not over $34,500 $850 plus 15% of the excess over $8,500

Over $34,500 but not over $82,250 $4,750 plus 25% of the excess over $34,500

Over $82,250 but not over $174,400 $17,025 plus 28% of the excess over $83,600

Over $174,400 but not over $379,150 $42,449 plus 33% of the excess over $174,400

Over $379,150 $110,016.50 plus 35% of the excess over $379,150

Standard deduction $5,800

To take an example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2011 and your status was Single, then your tax would be calculated like this:

($ 8,500   minus   0 )   x .10 : $   850.00 (you are taxed 10% on the first $8,350 of your earnings)

(34,500   minus   8,500 )   x .15 : $3,900.00(you are taxed 15% on earnings between $34,500 and $8,500)

(82,250   minus   34,500 )   x .25 : $11,938.00

(100,000   minus   82,250 )   x .28 : $4,970.00

    Total:   $ 21,703.00

This puts you in the 28% tax bracket since that's the highest rate applied to any of your income. Even though you are in the 28% tax bracket, you did not have all your income taxed at 28%, as you can see by this example.

Federal Income (Withholding) Tax

Federal Income (Withholding) Tax– The amount required by law for employers to withhold from earned wages to

pay taxes– The amount of money deducted depends on the amount earned and

information provided on the Form W-4

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Pay Period 6/11/2004-7/11/2004

$1,502.10$250.35Totals

$503.46$117.72$636.00$244.92$0.00$0.00

$106.00$40.82$83.91$19.62$0.00$0.00

Federal WithholdingState WithholdingFed OASDI/ EE or Social SecurityFed MED/ EE or MedicareMedical401K

$1,353.33

Year-to-dateCurrentDeductionsPay Type-Gross Pay

Employee Address293 Michael GroveBillings, MT 59102

Check Amount$1,102.98

Check #164

SSN201-92-4856

EmployeeBeakens, Joe

On-The-Go

Question:How does my employer figure out how much to take out of each of my paychecks for Federal taxes?

Answer:There are two main methods:

1. Tax charts

2. Percentage method

Using Tax Charts to Calculate Federal Withholding

• You have a copy of tax charts in the back of your book on pages A4 and A5

• These may not be exact so please do not use them to calculate your own federal taxes

• I will give you a handout also to eliminate flipping to the back of your book while doing your class work

• Use the tax charts given to you to find the answers to the following examples. Be sure to note that there are different charts for single and married persons

Example 1:Carla’s gross pay for this week is $425.88. She is married and claims 2 allowances—herself and her husband. What amount will be withheld from her pay for Federal Income Taxes?

Find the income range from the table for Married Persons weekly payroll period. (Appendix A4-A5 or handout)

Income range: 420-430

Find the column for 2 allowances.

The amount of income to be withheld is $14.

Example 2:Lance’s gross pay for this week is $460.00. He is

single and claims one allowance. What amount will be withheld from Lance’s pay for FIT?

Find the income range from the table for Single Persons weekly payroll period.

Income range: 460-470

Find the column for 1 allowance.

The amount of income to be withheld is $45

Complete the examples on your notes.• How much is withheld from the weekly wage of a married person

earning $297 with 1 withholding allowance?• $8• How much is withheld from the weekly wage of a married person

earning $379 with 2 allowances?• $9• How much is withheld from the weekly wage of a single person

earning $238 with no allowances?• $20• How much is withheld from the weekly wage of a single person

earning $318 with 5 allowances?• $0

Assignment:

Section 2.1, p. 131

Problems 5 -12

Closure:

What do you think about the “ fair tax” ?