net income chapter 2.1 federal income tax

Net IncomeChapter 2.1 Federal Income Tax

Objectives:• Determine the amount of tax withheld for federal income tax.

Those who have received paychecks before have noticed that the check did not total what the gross income should have been.

In this chapter we will discuss and calculate the deductions and withholdings that can occur from a paycheck.

In order for the federal government to pay for services, a federal income tax (FIT) is withheld from your paycheck.

The Internal Revenue Service (IRS) provides employers the tables necessary to determine the amount to withhold from employees paychecks.

The amount withheld depends on your amount of income as well as your marital status, and withholding allowances.

You may claim one allowance for yourself, one for your spouse, and one for each dependent you support.



One method for calculating federal income tax withheld is using the table Married Persons Weekly Payroll.

Dan Caine is a welder, is married and claims 1 allowance. His weekly income is $390.50. What is the federal income tax withheld?

Step 1: Find the income range from the table.

Step 2: Find the column for 2 allowances.

Step 3: Cross intersect to find the amount of federal income tax withheld.

The amount withheld is $18.00.

Percentage Method. Some companies use a percentage method to compute income tax withheld. Percentage method uses taxable wages to determine the withholding amount. Taxable wage depends on the number of allowances you claim and the weekly allowance rate.



𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠 ∙ 𝑊𝑒𝑒𝑘𝑙𝑦 𝑅𝑎𝑡𝑒

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 − 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡

𝐴𝑚𝑜𝑢𝑛𝑡 𝑤𝑖𝑡ℎℎ𝑒𝑙𝑑 𝑓𝑜𝑟 𝐹𝐼𝑇 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑤𝑎𝑔𝑒 𝑎𝑛𝑑 𝑎 𝑡𝑎𝑏𝑙𝑒

Percentage Method of Withholding – Single Person

Each Weekly Allowance = 63.46

Weekly Taxable Wage Amount of income tax to withhold:

Over But not over

$51.00 $195.00 $0.00 plus 10% of excess over $51.00

195.00 645.00 14.40 plus 15% of the excess over 195.00

645.00 1,482.00 81.90 plus 25% of excess over 645.00



Lance Hart’s gross pay fro this week is $393.23. He is a carpenter’s apprentice, is single, and claims 2 allowances. Using the percentage method, what amount will Lance’s employer withhold for federal income tax?

Step 1: 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠 ∙ $63.46

Step 2: 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 − 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝐴𝑚𝑜𝑢𝑛𝑡

$126.92 = 2 ∙ $63.46

$266.31 = 393.23 − 126.92

Step 3: 𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑 𝑓𝑜𝑟 𝐹𝐼𝑇 = $14.40 + [ 15% ∙ $266.31 − 195 ]

$25.10

What happens if your employer does not withhold enough?

What happens if your employer withholds too much?

Net IncomeChapter 2.2 State Income Tax

Objectives:• Determine the amount of tax withheld for state income tax (SIT).

Like federal income tax, most states have a state tax. Florida and Texas do not have a state tax; however, the “other” taxes can be large to pay for the state provided services.

Some states express the state tax as a percentage using exemptions. Exemptions are very much like federal withholding allowances.

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 − 𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠

𝑆𝑡𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 ∙ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

Tony Raymond’s gross pay is $44,750 a year. The state income tax rate is 3% of taxable wage. He takes one exemption for himself and one exemption for his child. How much does Tony’s employer withhold from his gross earnings for state income tax.

Exemptions

Single $2,000

Married 4,000

Each Dependent 2,000

$44,750 − 2000 + 2000 = $40,750 $40,750 ∙ 3% = $1,222.50

Net IncomeChapter 2.2 State Income Tax

Objectives:• Determine the amount of tax withheld for state income tax (SIT).

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 − 𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠

𝑆𝑡𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 ∙ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

Andrea McReedy earns $52,600 per year. She is married and pays $2,430 in state income tax per year. She claims no other dependents. What is the state income tax rate for her state?

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 = $52,600 − $4,000 = $48,600

$2,430 = $48,600 ∙ 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒

𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 =$2,430

$48,600= 0.05 𝑜𝑟 5%

Net IncomeChapter 2.3 Graduated State Income Tax

Objectives:• Determine the amount of state tax withheld from a graduated scale.

Some states use a graduated income tax. This means that the more you earn the more tax you will pay.

This is exactly like graduated commission.

We need to introduce a new equation to aid us in determining the amount of taxes being withheld per paycheck.

𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑 𝑝𝑒𝑟 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 =𝐴𝑛𝑛𝑢𝑎𝑙 𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

Net IncomeChapter 2.3 Graduated State Income Tax

Objectives:• Determine the amount of state tax withheld from a graduated scale.

Louise Main’s annual salary is $34,500. She receives her pay semimonthly. Her exemptions total $2,000. Determine how much her employer deducts for state income tax per paycheck.

State Tax

Taxable Wages

Tax Rate

First $1,000 1.5%

Next $2,000

3.0

Next $2,000

4.5

Over $5,000

5.0%

Exemptions

Single $2,000

Married 4,000

Each Dependent

2,000

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑊𝑎𝑔𝑒𝑠 = $34,500 − $2,000 = $32,500

𝐹𝑖𝑟𝑠𝑡 $1,000: $1,000 ∙ 1.5% = $15.00

𝑁𝑒𝑥𝑡 $2,000:$2,000 ∙ 3.0% = $60.00

𝑁𝑒𝑥𝑡 $2,000:$2,000 ∙ 4.5% = $90.00

𝑂𝑣𝑒𝑟 $5,000: 32,500 − 5000 ∙ 5.0% = $1,375.00

𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑥𝑒𝑠 = $1,540.00

𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑 𝑝𝑒𝑟 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 =𝐴𝑛𝑛𝑢𝑎𝑙 𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑌𝑒𝑎𝑟=$1,540

24= $64.17

Net IncomeChapter 2.4 Social Security and Medicare Taxes

Objectives:• Calculate the amount withheld for Social Security and Medicare taxes.

The Federal Insurance Contributions Act (FICA) requires employers to deduct a percent of your income as taxes for Social Security and Medicare.

Social Security pays for retirement and disability benefits; while Medicare provides medical insurance. These benefits are for those who are 65 years and older.

Social Security tax rate is 6.2% and is paid on the first $97,500 of income. The Medicare tax rate is 1.45% with no limit on your earnings.

𝑇𝑎𝑥 𝑊𝑖𝑡ℎℎ𝑒𝑙𝑑 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 ∙ 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

Riley Henderson’s gross biweekly pay is $728. His earnings to date for the year total $26,208. What amount does his employer deduct from his pay this period for Social Security taxes and Medicare taxes?

𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 ∙ 𝑆𝑜𝑐𝑖𝑎𝑙 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑦 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 = $728.00 ∙ 6.2% = $45.14

𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 ∙ 𝑀𝑒𝑑𝑖𝑐𝑎𝑟𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 = $728.00 ∙ 1.45% = $10.56

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = $45.14 + $10.56 = $55.70

Net IncomeChapter 2.5 Group Health Insurance

Objectives:• Calculate the deduction for group health insurance.

Many businesses offer to pay for health insurance because group insurance rates are cheaper than individual rates.

Most companies will often pay part of the insurance costs, or premium, while the employee pays for the remaining percentage.

𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒′𝑠 𝑆ℎ𝑎𝑟𝑒 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 ∙ 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒′𝑠 𝑃𝑒𝑟𝑐𝑒𝑛𝑡

The employee’s amount is then deducted each pay period.

𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 =𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 𝑃𝑎𝑖𝑑 𝑏𝑦 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑌𝑒𝑎𝑟

Nadine McClure has family medical coverage through her company. The annual cost is $9,800. The company pays 75% of the cost. How much does she have deducted from her biweekly paycheck?

100% - 75% = 25% employee pays $9,800 ∙ 25% = $2,450 𝑡𝑜𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑝𝑎𝑦𝑠

$2,450 ÷ 26 𝑝𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 = $94.23 𝑑𝑒𝑑𝑢𝑐𝑡𝑒𝑑 𝑝𝑒𝑟 𝑝𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑

Net IncomeChapter 2.5 Group Health Insurance

Objectives:• Calculate the deduction for group health insurance.

Kim Choi pays $115.80 per month for group medical insurance. Her employer pays 55% of the cost. How much is the annual premium.

100%− 55% = 45% 𝐾𝑖𝑚 𝑝𝑎𝑦𝑠

𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑒′𝑠 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 ∙ 𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓𝑃𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟= 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑝𝑎𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

0.45 ∙ 𝑥

12= $115.80

𝐾𝑖𝑚′𝑠 𝑎𝑛𝑢𝑎𝑙 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = $3,088.00

Net IncomeChapter 2.6 Statement of Earnings

Objectives:• Calculate the net pay per pay period.

As we have discussed, there are deductions from our paychecks for federal and state taxes, insurance, Social Security, and Medicare. Other deductions may occur for union dues, community contributions, savings and/or retirement plans.

Attached with your pay stub is an itemized list of all your deductions called a statement of earnings. The statement of earnings shows your gross pay, all your deductions and a bottom-line figure which is your net pay.

Net Pay is the amount of money you have left after all withholdings and deductions are subtracted from your gross pay. Tis is sometimes called your net income or your take-home pay.

𝑁𝑒𝑡 𝑃𝑎𝑦 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑎𝑦 − 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠

net income chapter 2.1 federal income tax

Documents