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Understanding Income, Benefits, and Taxes in Everyday Life

Learn about earning sources like wages, salaries, tips, commissions, and more. Understand benefits, taxes, and deductions from your paycheck. Discover the importance and types of taxes, along with social security benefits. Get insights on different tax forms and the process of filing tax returns.

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Understanding Income, Benefits, and Taxes in Everyday Life

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  1. Chapter 2 Income, Benefits, and Taxes

  2. What Are the Sources of Earned Income? • A wage is pay for each hour worked. • Minimum wage – lowest rate by law • Currently $7.25 in PA (Federal) • Overtime – 1½ times regular rate • A salary is set pay for each month or year worked. • Generally no overtime 2-1 Earned Income and Benefits Slide 2

  3. What Are the Sources of Earned Income? • A tip is compensation for a service. • Often a percentage • Different minimum wage laws • A commission is a set fee or percentage. • Sales: • Cars • Real estate • etc 2-1 Earned Income and Benefits Slide 3

  4. What Is Unearned Income? • Money received from a source other than working in a job • Private • Government • Can you think of an example? 2-2 Unearned Income and Benefits Slide 4

  5. What Is Unearned Income? 2-2 Unearned Income and Benefits Slide 5

  6. What Are Employee Benefits? Benefits are forms of pay other than salary or wages. Benefits can increase disposable income. Disposable income: money available to spend or save after taxes have been paid 2-1 Earned Income and Benefits Slide 6

  7. Types of Employee Benefits • Pay without work • Vacation • Sick days • Personal days • Paid holidays • Education • Perks • Parking spaces • Expense account 2-1 Earned Income and Benefits Slide 7

  8. Types of Employee Benefits • Insurance/HSAs • Health • Life • Disability • Workers’ Comp • Retirement plans • 401k • 403b • Stock option plans 2-1 Earned Income and Benefits Slide 8

  9. What Type of Taxes Do You Pay? • Taxes are based on consumption, income, and wealth. • Direct taxes are paid directly to the government. • Examples: income and property taxes • Indirect taxes are charged on goods or services bought by the consumer. • Examples: use, excise, and sales taxes 2-2 Unearned Income and Benefits Slide 9

  10. Use Taxes • Only those who use the product or service • Examples: • Tolls • Parks 2-2 Unearned Income and Benefits Slide 10

  11. Excise Taxes • Only those who purchase the product or service • Examples: • Gas • Cigarettes • Alcohol • Utilities • Luxury taxes 2-2 Unearned Income and Benefits Slide 11

  12. Other Taxes • Sales Tax • Income Tax • Wealth Taxes • Property • Estate • Inheritance • Gift 2-2 Unearned Income and Benefits Slide 12

  13. How Do You Benefit from Paying Taxes? • Direct benefits • Examples: social security, police, national parks • Public goods • Indirect benefits • Examples: public education for citizens, free vaccines 2-2 Unearned Income and Benefits Slide 13

  14. Social Security Social Security Benefits • Workers pay into the social security fund through payroll deductions. • A social security number is assigned to each person. • Employers match the payments. • Upon retirement, workers receive a monthly benefit check. 2-2 Unearned Income and Benefits Slide 14

  15. Understanding Your Paycheck • Gross pay is your total salary or wages. • Net pay is your gross pay minus deductions. • AKA – Take Home Pay 2-3 Taxes and Other Deductions Slide 15

  16. What Are Paycheck Deductions? • Adeductionis money withheld from a paycheck. • Required deduction examples: income tax, social security tax, Medicare tax • Optional deduction examples: health insurance, life insurance, retirement plans 2-3 Taxes and Other Deductions Slide 16

  17. Understanding Your Paycheck • Income Tax • Amount based on exemptions (people you claim on your tax return as a dependent) • FICA (Federal Insurance Contributions Act) • Made up of Social Security Tax and Medicare Tax • You pay half and employer pays other half • Social Security – 6.2% • Medicare – 2.9% 2-3 Taxes and Other Deductions Slide 17

  18. Understanding Your Paycheck 2-3 Taxes and Other Deductions Slide 18

  19. Why Do We Pay Income Taxes? • Why do we have to pay taxes? • How is our money used? • Video: If Your Paycheck Could Talk Slide 19

  20. Tax Forms • New employees fill out: • I-9 Proves your eligibility • W-4 Determines your withholding • Provided to employees: • W-2 Your earnings and payments • 1099 Payments from non-employers Slide 20

  21. Form W-4 Withholding allowances (exemptions) 2-3 Taxes and Other Deductions Slide 21

  22. FormI-9 Proof that you are eligible to work in the US 2-3 Taxes and Other Deductions Slide 22

  23. Form W-2 • Reports a worker’s taxable income for the year 2-3 Taxes and Other Deductions Slide 23

  24. Form 1099 Income received other than salary from employer 2-3 Taxes and Other Deductions Slide 24

  25. Filing Tax Returns • Form used depends on types of income and deductions • 1040 – Long version; used for itemized deductions/complicated tax returns • 1040A – a tax return that allows more options for income and deductions • 1040EZ – atax return for filers with no dependents or itemized deductions • NEW IN 2018: Updated 1040; no more 1040A or 1040EZ 2-3 Taxes and Other Deductions Slide 25

  26. Filing Tax Returns • 1099-INT – reports interest earned • 1098 E – reports student loan interest paid • All forms mailed out by employers no later than January 31 • Must file by: April 15 • E-Filing is a fast, easy option 2-3 Taxes and Other Deductions Slide 26

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