Where Does Your Paycheck Money Go? Almost 31% of an individual’s paycheck is

deductedTaxes are the largest expense most individuals

will haveTherefore, it is important to understand the

systematic deductions U.S. tax system operates on an ongoing

payment systemTaxes are immediately paid on income earned

What kind of deductions are taken from your paycheck?

Government mandated taxes: Federal Tax State Tax FICA

This tax includes two separate taxes:○ Social Security○ Medicare

Voluntary deductions from your paycheck include:

Health/dental/vision insurance, 401k plan contribution, FSA (flexible spending account)

• The number of exemptions (allowances) you claimed– Are you claiming anyone as a dependent? – Does anyone claim YOU as a dependent?

• Dependent - a person who relies on the taxpayer for financial support, like a child or nonworking adult.

• How much your salary is and which salary schedule you fall into

Explanation of Federal, Explanation of Federal, State, and FICA taxesState, and FICA taxes

What determines the FEDERAL tax rate?◦This represents the largest deduction taken

from an employee’s gross income. ◦The amount withheld depends on two

things: 1. the amount of money earned and 2. the information provided on the Form W-4.

What determines the STATE tax rate? ◦The percentage deducted depends on the

amount of gross pay the employee has earned.

The Federal and State taxes are used to assist in fundinggovernment agencies either within your state or within

the U.S. – i.e. police stations, schools, fire stations, libraries,

Explanation of Federal, State, and FICA taxes

What are FICA taxes used for, and how much is withheld from your paycheck? Again, FICA covers 2 things:

Social Security and Medicare Social Security is the nation’s RETIREMENT program.

This tax helps provide retirement income for the elderly and pays disability benefits.

Social Security taxes are based on a percentage (6.2%) of the employee’s gross income.

The employer must also pay these taxes to the govt. They must match the tax contribution made by the employee.

Medicare is the nation’s HEALTH CARE program for the elderly and the disabled This tax provides hospital and medical insurance to those

who qualify. Medicare taxes are based on a percentage (1.45%) of the

employee’s gross income.

The Federal Government Dollar- Where It Comes From

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The Federal Government Dollar- Where Your Dollar Goes

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What forms do you fill out when hired at a job?

Filling out a W-4To complete a Form W-4:• Print or type legal name on Line 1 and home address directly below the name.• Write Social Security number on Line 2.• On Line 3, check the appropriate box to indicate marital status.• Enter a zero on Line 5 if not claiming any allowances. Reminder: An employee cannot

claim an allowance for him/herself if a parent or guardian is claiming him/her as a dependent.

• Sign name and date the form before giving it to the employer.• An employee should be sure to receive a copy of all tax forms completed for his/her

personal records.

By claiming zero, the highest amount of tax will be withheld.By claiming zero, the highest amount of tax will be withheld.

You are exempt from income tax withholding only if your income for the year will be less than $800.

You are exempt from income tax withholding only if your income for the year will be less than $800.

The more exemptions you claim, the bigger your paycheck will be. The less exemptions you claim, the smaller your paycheck will be. If you claim too many exemptions on your W4, you may have to pay in taxes to the IRS at tax time each year.

The more exemptions you claim, the bigger your paycheck will be. The less exemptions you claim, the smaller your paycheck will be. If you claim too many exemptions on your W4, you may have to pay in taxes to the IRS at tax time each year.

The Form I-9 is the Employment Eligibility Verification form.

I-9’s are used by employers to verify the eligibility of individuals for employment thereby avoiding hiring undocumented workers or others who are not eligible to work in the United States.

All employees, citizens, and non-citizens must complete a Form I-9 at the time of hire.

A prospective employee must provide documentation which establishes identity and employment eligibility. › Examples of documentation include a passport, driver’s

license, U.S. Military card, social security card, etc.

In January of each year, you receive a W-2 from your employer showing your total earnings & deductions for the year. You will use the numbers from your W-2 to fill out your 1040EZ, which is then submitted to the IRS.

You fill out a

After you receive a:

W-2 from your employer,

Tax Avoidance vs. Tax Evasion• Finding “extra” things to legally deduct from

your taxes is encouraged by the govt, and is considered tax avoidance▫The IRS allows taxpayers to claim certain

deductions, credits, and adjustments to income.

▫Many people pay more federal income tax than necessary because they misunderstand tax laws and fail to keep good records.

▫Daycare expenses, contributions to church or nonprofit organizations, mortgage interest, etc. – these are all deductible expenses

• Tax Evasion is against the law – withholding information or lying on your taxes

Tax Avoidance or Tax Evasion?

•1) Keeping a log of business expenses •2) Ignoring earnings from lawn mowing•3) Not reporting interest earned on

savings account•4) Keeping a log of contributions to

charity •5) Not reporting tips •6) Claiming your dependents as tax

deductions

Check for Understanding• If Thomas earned $6.00 per hour, and

worked 15 hours this pay period, what would his gross pay be?▫$6.00 * 15 = $90

•Michael is single and earns $50,000. Anna and John are married and also have a combined income of $50,000. Michael ended up having to pay more in taxes to the IRS than Anna & John. Why?▫Because Michael’s income is based on a single

income

•ABC Corporation and XYZ Corporation have the same type of business and both had the same amount of profits this year. However, ABC Corporation had to pay less in taxes than XYZ. Why could this be?

•Lisa is 23 and lives with her parents. Can she claim herself as an allowance on her W-4?▫No. She is already being claimed by her

parents. She must enter a 0.