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Ch 7 Income taxes

7.3 Income Statements. Ch 7 Income taxes. Answer the following with your groups. Why is your take home pay less than your salary? What is net proceeds? What is net pay? How are these two related? What kind of taxes are taken out of each paycheck? (make a list). Everyone pays taxes….

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Ch 7 Income taxes

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  1. 7.3 Income Statements Ch 7 Income taxes

  2. Answer the following with your groups.. • Why is your take home pay less than your salary? • What is net proceeds? • What is net pay? • How are these two related? • What kind of taxes are taken out of each paycheck? (make a list)

  3. Everyone pays taxes… • An employee’s gross pay is their total pay • The amount of money an employee actually takes home is called their net pay • Clearly the net pay is going to be less than the gross pay • Each pay stub (paycheck) gives the employee a list of their wages and deductions

  4. Deductions • The tax deductions are based on an employees W-4 Form,Employees Withholding Allowance Certificate • Employers withhold deductions and submit them to the appropriate government or private agency • Federal, state and income taxes are called withholding taxes • The employers withhold these and send them to the government • Social Security and Medicare are also withheld and sent to the government

  5. W-2 and 1099 • At the end of the year the employer compiles the deductions that have been withheld from each employee • The withholding data is placed on a W-2 Form, Wage and Tax Statement • When filing your income taxes you must submit a copy of your W-2 Form • A Form 1099 is filed when an employer gets income from something other than wages, salaries or tips

  6. Example 1 • Barbara started a new job and wants to verify that her net pay has been computed correctly. Her gross pay per pay period is $269.75. She has the following deductions: FICA tax 6.2%, Medicare tax 1.45%, federal withholding tax $47.51, state withholding tax $16.62, 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?

  7. Check your understanding • 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.

  8. Example 2 • 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 federal and state taxes?

  9. Check your understanding • Employees can choose to increase their tax withholding if they feel that the amount calculated for the tax deductions may not be enough to meet the total tax at the end of the year. From her past records, Lorna knows that her total tax is usually 30% of her annual salary. At the rate of deduction shown on this pay stub, will Lorna’s employer have taken enough out of each paycheck to meet her tax obligation for the year? Explain your answer.

  10. Example 3 • On January 30th, Joanne Toscano received this W-2 form from her employer. How much did Joanne pay in taxes during the year?

  11. Check your understanding • What percent of Joanne’s gross income did she actually take home?

  12. Example 4 • Amy Springfield works for Pound Ridge Financial Planners. Her employer uses an electronic W-2 form as shown below. 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?

  13. Hmm.. • Any deductions from gross pay before taxes have been taken out are called tax deferred contributions • Taxes will eventually be taken out on the contribution just not at this time • There is also something called a cafeteria plan which allows employees to hold back a portion of their pre-tax wages for the payment of certain medical, childcare, parental care and nonreimbursed medical insurance expenses • This is a type of flexible spending account (FSA), an employer sponsored plan in which employees choose to deposit funds that will be used for sole purposes outline above and only in the specified 12 month period of time

  14. 1099 Form • Used to report different types of income other than wages, salaries, and tips, such as bank interest, royalties, contracted work and so on. • Unlike on a W-2 the wages on a 1099 have yet to be taxed

  15. Ch 7 Asnmt 3 • pp.349-351#3-12all

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