Copyright 2007 Thomson South-Western

Unit 5 Taxes

Building Your Future

Chapter 5 TaxesKey Terms

• Taxes• Sales tax• Excise tax• Property Tax• Assessed value• Market vale• Income Tax• Exemptions• Personal exemption• Dependent exemption• Deduction• Charitable contribution

• Itemized deduction• Taxable Income• Progressive tax rates• US Treasury• Internal Revenue Service

(IRS)• Payroll taxes• Social Security• Medicare• Credit• Child tax credit• Refund Slide 2

More Terms

• Gross Pay• Net pay• Voluntary deductions• Involuntary deductions• Pay period

Slide 3

Different ways people get paid

• Hourly wage• Overtime• Salary• Commission• Salary plus commission• Tips• Piecework rate• Self employment income

Slide 4

Hourly Wage

• is an amount of money paid to an employee at a specified rate per hour worked.

• The number of hours worked multiplied by the hourly wage equals the gross earnings for the pay period

• Minimum wage is the lowest pay rate allowed by law for each hour of work. Each state has set a rate higher than the federal rate. Go to US Dept of Labor Slide 5

Overtime Pay

• Employers are required to pay overtime when employees covered by certain state and federal laws work more than 40 hours per week.

• The overtime rate, set by the Fair Labor Standards Act of 1938, is 1½ (1.5) times the employee’s regular hourly pay rate.

• Example A worker who makes $8/hr.may make $12/hr. for overtime

Salary

• A fixed amount of money paid to an employee for each pay period

• An employee who is paid a salary earns the same amount regardless of the number of hours worked during the pay period

Slide 7

Tips and Commissions

• Tip is money often a percentage of the total bill or a gift given to a person for performing a service

• Commission is an amount paid to an employee based on a percentage of the employee’s sales

• Some salespeople earn a base salary plus a commission or bonus on the amount of their sales

Slide 8

Piecework rate

• You earn a set amount for each piece produced or for each piece produced that exceeds the expected level of production.

Slide 9

Pay period

• How often you will be paid– Weekly every week– Biweekly every 2 weeks– Semimonthly twice a month– Monthly once a month

Slide 10

Self-Employed

• A person who takes the risks of being self-employed and owning a business is called an entrepreneur.

• Profit is the amount left after all costs are deducted from the income of a business.

Slide 11

“You can’t escape death and taxes”

• Ben Franklin

Slide 12

What are taxes?

Are you a taxpayer?

Taxes – Fees charged by the government on products, activities or income

Paid by taxpayers – A person who pays a tax to national, state, county or municipal (city/town) governments

Community

Community - a group of people working together

for a common good

United States

State County City/ town

What are benefits of being a part of these communities?

Roads Libraries

Military for national security

Public schoolsPolice and fire departments Recreation

(parks, trails)

?

“You are better off being in a community than by yourself”

As a community member you receive many benefits you

could not pay for individually

Taxes are a way that members of a community provide for one another

How do taxpayers pay taxes?

Income Tax

Payroll Tax

Property TaxSales Tax

Excise Tax

Income taxIncome tax – tax paid

on the money one earns from working and on unearned

income

Earned income -money earned from working for

pay

Unearned income - income received from

sources other than employment

Example: Wages and salaries earned from

employment

Example: Interest earned from a savings account

Components of income tax

Federal income

tax

State income

tax

Income tax

Voluntary vs. Involuntary Deductions from your paycheck

Voluntary vs. involuntary

(optional vs. mandatory)

Involuntary – Federal & State Income Tax

Social Security and Medicare (FICA Tax)

Voluntary- Health benefits, pension contributions, bonds, union dues, etc.

Slide 20

Federal Income Tax

Tax is determined by? Paid by? Helps fund?

• Earned and unearned income

• Higher income = More tax paid

• Majority of people living in the U.S.

• Operations of federal government

• Government programs• Education• Defense of

the nation• Disaster

relief

State Income Tax

Tax is determined by? Paid by? Helps fund?

Does your state have state income tax?

• Earned and unearned income

• Higher income = More tax paid

• Those living in states with a state income tax

• Not all states have a state income tax

• Varies by state• Examples:

• State highways• Operations of

state government

Payroll Tax

Payroll tax – A tax on earned income that supports the Social Security and Medicare programs (also known as

FICA)Tax is determined by? Paid by? Helps fund?

• A set percentage of earned income

• Deducted out of paycheck (except for self-employed)

• Individuals who earn income from working for pay

• Employers

• Social Security program

• Medicare program

What is Social Security and Medicare?

• Social security is a federal government program funded through payroll taxes; designed to provide retirement and disability income for those meeting the specified criteria.

• Medicare is a federal government program funded through payroll taxes; pays for health care expenses for citizens over age 65 or those who meet other criteria Slide 24

What is Social Security?

Purpose Tax charged• Income for:

• Retirees • People with profound

disability• Children who have lost a

parent• A person with children

who has experienced the death of a spouse

• 6.2% of earned income)• Up to an annual maximum

2012 $110,00• Both the employer and

employee pay equal amount

What is Medicare?

Purpose Tax charged• Helps pay for health care

for senior citizens• 1.45% of earned income• No limit on all your

earnings• Both the employer and

employee pay equal amount

What is the difference between income tax and payroll tax?

Income Tax Payroll TaxPaid on both earned and unearned income

Paid on only earned income

Amount paid depends on many different factors but increases as income increases

A set percentage of earned income is paid

Funds many different operations and programs of the federal government

Funds the Social Security and Medicare programs

Employers also pay Social Security and Medicare

Match their employees tax contributions

Self-employed people pay both the employee and employer

contributions

Employee contribution:

$100

Employer contribution:

$100

Employer pays $200 in payroll

taxes to the federal

government

How are tax rates determined?

Determined by public representatives (city councils, county commissions, state legislatures, Congress)

Elected by voters

Taxpayers = voters

Work as a voting group to elect representatives who will represent the majority

Excise TaxState or federal tax placed on non-essential consumer goods or consumption items

Tax is determined by? Paid by? Helps fund?

• Purchase of certain items:• Gas• Hotel rooms• Airline

tickets• Cigarettes• Alcohol

• Often included within the price of these items

• Anyone who purchases certain items

• Varies by location

• Expenses of state and local governments

Sales Taxa tax imposed by many states, counties and

cities on items purchased in retail stores

Tax is determined by? Paid by? Helps fund?

Does your state have sales tax?

• A percentage added to the original price of an item

• $1.00 item charged 7% sales tax = $1.07

• Anyone who purchases an item charged with sales tax

• Some states don’t have sales tax

• Expenses of state and local governments

Slide 32

Property TaxProperty tax - a tax on property, such as land, buildings (including homes),

and motor vehiclesTax is

determined by? Paid by who? Helps fund?• Percentage of

property value• Amount paid

varies depending upon where you live

• Property ownerso Fee to

license car is a property tax

• Schools• Expenses of

state and local governments

• property tax• tax paid by people • who own items such as homes, land, and vehicles to

the city and/or county where the property is located • assessed value• the amount the property is worth for tax purposes as

determined by city or • county assessors• market value• what you would receive if you sold the property

Slide 34

Slide 35

Taxes and Money Management

Why do you think understanding taxes is an important part of money management?

Taxes play a role in both earning and spending

One of the largest expenses for many people

ConclusionWithout taxes it would be

hard to pay for many of the benefits of being a member

of a community

Taxes are charged in many different forms

The amount of taxes you pay and what you pay those taxes on will vary depending

upon where you live and your income

Understanding taxes is an important part of money

management