Payroll Taxes

(The part you earn but don’t get to take home!)

Income Tax History(How did we get from the Boston

Tea Party to THIS?) Income taxes were first levied to fund the

Civil War. They were repealed, put back, repealed

again . . . In 1913, the 16th amendment made the

income tax a permanent fixture

Social Security

On June 8, 1934, President Franklin D. Roosevelt, in a message to Congress, announced his intention to provide a program for Social Security.

What were national conditions during this year???? Industrial Revolution Decrease in “family farms” and the security they provided Depression Dust Bowl

All people throughout human history have faced the uncertainties brought on by death, disability and old age.

Social Security

and Medicare Today

Social Security tax rate in 2001 6.20% Medicare tax rate in 2001 1.45% Total payroll taxes in 2001 7.65%

If an employee earns $1,000 in 2001, the payroll taxes are:Social Security tax $62.00Medicare tax $14.50Total FICA payroll taxes $76.50

The employer sends the $76.50 to the federal government.

There is a maximum annual amount of Social Security tax withheld per employee. Social Security taxes are not withheld on amounts over the earnings limit. In 2001, the earnings limit was $80,400, and the maximum Social Security tax was $4,984.80.

Employees complete Form W-4Employers use Form W-4 to determine how much federal income tax to withhold.

The amount of federal income tax withholding depends on:• the employee's marital status, • the number of withholding allowances claimed by the employee, • any additional amount the employee wants to withhold, and • any exemptions from withholding that the employee claims.

Comprehensive Example

Angela Viviano earns $2,000 a month as a physical therapist's assistant. In addition to payroll taxes and income tax withholding, her employer withholds $50 for her retirement account. Angela's net pay is calculated as follows:

Gross pay $2,000Social Security tax (6.2 percent of gross pay)-$124Medicare tax (1.45 percent of gross pay)-$29Income tax (per Form W-4)-$220Retirement-$50Net pay$1,577

Angela earns $2,000 and receives $1,577. Her employer sends $373 ($124 + $29 + $220) to the federal government and $50 to the retirement fund.

Wages, salaries, and tip income are reported on Form W-2, Wage and Tax Statement.

Employers provide Form W-2 to the employee and to the federal government.

Employees use Form W-2 to complete their tax returns.

All wages, salaries, and tip income are taxable even if they are not reported on Form W-2.

Unless specifically excluded, all wage and salary income is taxable.

All tip income is taxable.

Employers report wage, salary, and tip income on Form W-2, Wage and Tax Statement.

Employees use Form W-2 to complete their tax returns.

Taxpayers need to report all taxable income, even if it does not appear on Form W-2.

Taxes pay for infrastructure:

Highways, Schools, Social Systems, Military, etc.

Interest is the charge for the use of borrowed money.

In most cases you will earn interest if you let others use your money.

Your money earns interest when it is • deposited in accounts in banks, savings and loans, and credit unions. • used to buy certificates of deposit or bonds. • lent to another person or business.

Interest is considered unearned income because money, not a person, is working to earn the income.

Taxable interest income is earned from • savings and checking accounts. • U.S. Savings Bonds. • savings certificates (certificates of deposit or CDs). • money market certificates.

Tax-exempt interest income is earned from bonds issued by entities in states, cities, counties, or the District of Columbia, such as: • port authorities. • toll-road commissions. • community redevelopment agencies. • qualified volunteer fire departments.

All taxable interest income should be reported, even if it does not appear on Form 1099-INT.

A dependent is a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption.

Each dependency exemption decreases income subject to tax by the exemption amount. The exemption amount changes each year. • For 2002, the exemption amount was $3,000.

A taxpayer cannot claim a dependency exemption for a person who can be claimed as a dependent on another tax return.

To claim a dependency exemption, all of the dependency tests must be met. • member of household or relationship test • citizen or resident test • joint return test • gross income test • support test

The filing status determines the rate at which income is taxed.

The five filing statuses are: • single • married filing a joint return • married filing a separate return • head of household • qualifying widow(er) with dependent child

Some taxpayers can use more than one filing status. Usually, taxpayers choose the filing status that results in the lowest tax.

The standard deduction reduces the income that is subject to tax. The amount of the standard deduction depends on

• the filing status, • the age of the taxpayer and spouse, • whether the taxpayer or spouse is blind, and • whether the taxpayer can be claimed as a dependent on another taxpayer's return.

Refunds

When total tax payments are greater than the total tax, the taxpayer can • receive the refund by direct deposit to an account at a financial institution. • receive the refund by check in the mail. • apply the refund to the estimated tax for the following year. Direct deposit benefits

Direct Deposit Benefits Speed receive the refund fast Security no check to get lost Convenience no need to go to the financial institution to deposit a check Cost less than issuing a check

Taxpayers receive refunds when their total tax payments are greater than the total tax. • Refunds can be received by check in the mail or by direct deposit.

Taxpayers must pay an amount due when the total tax is greater than their total tax payments. • Payments can be made by check, money order, credit card, or direct debit (electronic filers only).

It is important for taxpayers to keep good records in order to prepare their tax returns and support items on their tax returns.

Record Keeping

It is important that taxpayers keep good records to • identify sources of income. • track expenses. • prepare tax returns quickly and accurately. • support items on the tax return.

Typical records include: • checkbooks, check registers, monthly statements, and Forms 1099-INT • receipts, invoices, and sales slips • pay stubs and Form W-2

Some taxpayers use computerized systems to track income and expenses. • These taxpayers also need to keep original documents, such as sales slips and receipts.

Taxpayers should print and keep copies of the tax returns they send to the IRS.

Taxpayers need to keep tax-related documents for at least three years from the date the return was filed.