Slide 1

6-3 INCOME

STATEMENTS

OBJECTIVES

Interpret and use the information on a pay stub, W-2 form,

and 1099 form.

Understand tax consequences of self-employment

You will need:

• Papers on the

student table

• Textbook

• Calculator

• Pen or Pencil

• Notebook PaperRed Items are needed

during the lecture

To do now:1. Write down the objective

2. Take out earbuds

If you earn $10 an hour at your job and you

worked 30 hours last week – will your

paycheck be for $300?

Why not?

Deductions!

Slide 4

Example 1A – Net Pay

Barbara started a new job and wants to verify that her net pay (the amount she will receive) has been computed correctly.

Her gross pay per pay period is $469.75.

She has the following deductions:

• Social Security tax 6.2%,

• Medicare tax 1.45%,

• federal withholding tax $110.51,

• state withholding tax $66.62,

• retirement insurance contribution $9.00,

• disability insurance fee $2.56,

• medical insurance fee $12.00,

• and dental insurance fee $6.00.

What should her net pay be for this pay period?

Slide 5

Example 1A – Net Pay

Barbara started a new job and wants to verify that her net pay has been computed correctly. Her gross pay per pay period is $469.75. She has the following deductions: Social Security tax 6.2%, Medicare tax 1.45%, federal withholding tax $110.51, state withholding tax $66.62, retirement insurance contribution $9.00, disability insurance fee $2.56, medical insurance fee $12.00, and dental insurance fee $6.00. What should her net pay be for this pay period?

Step 1: Determine each “%” deduction

Deduction = Gross Pay x %(converted)

SS tax = 469.75 x .062

= $29.12

Medicare tax = 469.75 x .0145

= $6.81

Slide 6

Example 1A – Net Pay

Barbara started a new job and wants to verify that her net pay has been computed correctly. Her gross pay per pay period is $469.75. She has the following deductions: Social Security tax 6.2%, Medicare tax 1.45%, federal withholding tax $110.51, state withholding tax $66.62, retirement insurance contribution $9.00, disability insurance fee $2.56, medical insurance fee $12.00, and dental insurance fee $6.00. What should her net pay be for this pay period?

Step 2: Add the deductions

29.12 + 6.81 + 110.51+ 66.62 + 9.00 + 2.56 + 12.00 + 6.00

= 242.62

Slide 7

Example 1A – Net Pay

Barbara started a new job and wants to verify that her net pay has been computed correctly. Her gross pay per pay period is $469.75. She has the following deductions: Social Security tax 6.2%, Medicare tax 1.45%, federal withholding tax $110.51, state withholding tax $66.62, retirement insurance contribution $9.00, disability insurance fee $2.56, medical insurance fee $12.00, and dental insurance fee $6.00. What should her net pay be for this pay period?

Step 3: Determine net pay

Net Pay = Gross Pay – Total Deductions

= 469.75 - 242.62

= $227.13

Slide 8

What percentage of Barbara’s gross pay for this pay period accounts for all of her deductions? Round to the nearest tenth of a percent.

% of Gross Pay Going to Deductions= . Deductions. x 100

Gross Pay

= 242.62 x 100469.75

= 51.6%

Example 1B – % Deductions

Would you

get to keep

more of your

earnings if

you owned

your own

business?

NO! You now have to pay your

portion and the employer’s

share of you FICA taxes!!

Slide 10

➢An employer has to match the FICA taxes.

➢A self employed person must pay BOTH the employee and employer’s share of FICA.

➢They must also send the FICA taxes to the government every 3 months using Form 941.

What additional taxes would Barbara’s have to pay if she had been self employed?

Self-Employed Additional Taxes

= Employer SS + Employer Medicare

= 29.12 + 6.81

= $35.93

Example 1C – Self Employed

Self Employed Additional Taxes

How much do the deductions

cost you in an entire year?

Slide 12

Example 2 – Annual Deductions

Examine Lorna’s biweekly pay stub. Assuming that Lorna’s salary and deductions remain the same throughout the calendar year, how much will be taken out of her total annual gross salary for state taxes?

Annual Deduction =

Paycheck deduction

x # of check per year

= 280.89 x 26

= $7,303.14

If you have a job, your employer must send

you a W-2 form in January every year.

What does it tell you?

Slide 14

Example 3A – W-2On January 30th, Joanne Toscanoreceived this W-2 form from her employer. How much did Joanne pay in income taxes during the year?(Note: FICA taxes are NOT income taxes.)

15,851.00 + 5,344.50 + 1,092.00 = $22,287.50

Slide 15

Example 3A – You Try It!On January 30th, Amyreceived this W-2 form from her employer. How much did she pay in FICA taxes during the year?

Slide 16

Example 3A – You Try It!On January 30th, Amyreceived this W-2 form from her employer. How much did she pay in FICA taxes during the year?

5,710.20 + 1,335.45 = $7,045.65

Example 4AAmy Springfield works for Pound Ridge Financial Planners. What accounts for the difference between her wages listed in Box 1 and her Social Security and Medicare wages listed in Boxes 3 and 5?

Answer: Boxes 12 and 14 list Tax deferred deductions. That is

income that is exempt from income tax but NOT FICA taxes.

Slide 18

Example 4B – Take Home %What percent of Amy’s gross income did she take home according to her W-2?

Step 1: Determine Gross Wage

(It is listed in box 5)$92,100.00

Example 4B – Take Home %What percent of Amy’s gross income did she take home according to her W-2?

Step 2: Add the deductions15,780+5,710.20+1,335.45+12,200+1,000+5,523 = $41,548.65

Example 4B – Take Home %

What percent of Amy’s gross income did she take home according to her W-2?

Step 3: Find the take home percentTake Home % = Gross – Deductions x 100

Gross

= 92,100 – 41,548.65 x 10092,100

= 55%

Slide 21

1099 Form

Required reading Page 353

It will be on the test!

What do I do now?

The 6-3 Assignment

When is it due?

Next Class