Chapter 55.1 Taxes and Your Paycheck

Scenario:

Kelly found a part time job after school that pays $7.50/hour. She wanted to take home at least $50 a week, so she agreed to work 7 hours each Saturday. She expected her first paycheck to be $52.50. She was surprised to find it was only $40.39.

Why wasn’t Kelly’s check larger?

Scenario:

Kelly found a part time job after school that pays $7.50/hour. She wanted to take home at least $50 a week, so she agreed to work 7 hours each Saturday. She expected her first paycheck to be $52.50. She was surprised to find it was only $40.39.

Why wasn’t Kelly’s check larger?

TAXES

Payroll taxes

Based on your earnings, they are paid to the government by you and your employer.

What’s Included in Payroll Taxes?1. Income Taxes

Paid on most income you receive, and are based on a sliding scale of percentages depending on your financial and family situation.

You are responsible for figuring out how much income tax you owe.

2. FICA (Federal Insurance Contributions Act)

Requires contribution by you and your employer to both Social Security and Medicare.

A Process Called Withholding

•Essentially prepays your taxes.•Makes people more likely to pay their

taxes since it’s collected steadily over the course of the year.

•Helps you out so you can pay a little bit at a time.

Your Paystub

Form W-4

•Your tax burden depends on several factors:

~ your gross income (see #6 on last slide)

~ number of people you support (ie. kids)

~ other expenses you may pay

This form determines how much should be withheld from your pay each pay period.

Your Responsibility

You are the one who must ensure your witholdings on your W-4 are correct.

If the amount you requested withheld is significantly above or below what you owe, the IRS may fine you.

Allowances: Your W-4 Calculations

This is the number of people you claim to support. Each allowance reduces the amount of income withheld from your paycheck.

Note: The number of allowances does not reduce the amount of tax you owe at the end of the year.

Adjusting AllowancesWithholding too much Withholding too little

• Sometimes too much is withheld when you work parttime as it is based on a 40 hour work week

• If you have income not taxed by your regular employer, you may need to:

• Send in extra tax payments

• Claim fewer allowances• Specify an extra amount to

be withdrawn

Withholding to save

•Forcing yourself to save by having taxes withheld—is this a good idea?