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Reflect on Learning: Can you list taxes commonly deducted from a paycheck? Answer: federal and state income taxes, local tax if the municipality has imposed one, SDI if the state charges it, and FICA which is Social Security (OASDI) and Medicaid. Paying the Correct Amount of Income Taxes No one wants to overpay the government, so figuring out exactly how much income tax you have to pay is important. You need to understand the system to make sure you’re paying the correct amount. Not too much, not too little, but just right! The amount an employee must pay in income taxes is based on: Tax Bracket. Income taxes are calculated on how much money you make. The amount of tax a person is required to pay is based on their tax bracket , which are set according to income levels. The federal income tax is a progressive tax which means that people with lower incomes are taxed at a lower rate than people with higher incomes . The tax rate progressively increases as an individual’s income grows. For example, a person earning $30,000 per year pays about 15% of their income in taxes, while a person earning $150,000 pays about 28%. IRS Form W-4. When an employee starts a new job, they have to fill out a lot of forms. One such form is IRS Form W-4 . The information an employee puts into this form tells the employer how much to withhold from their paycheck for payment of federal income taxes . It’s not stated in a dollar amount. Withholding is based on a formula that takes into account the employee’s tax bracket and number of allowances claimed by the employee. Allowances “allow” the employee to exempt some portion of their income from tax. Allowances are based on a variety of factors such as the number of children an employee has, whether they are married and the spouse is employed, etc. The more allowances an employee claims, the less money is withheld from their paycheck which increases their take home pay. If the employee claims more allowances than they should, they’ll end up with an ugly tax bill. If they claim too few allowances, they’ll overpay their taxes and receive a tax refund. The goal is to match your withholding with your actual tax liability and get it just right! Caution! Exempt from Withholding. Young taxpayers sometimes believe that because they make so little money, they do not have to pay income taxes. Based on this, they file an exemption from withholding directing the employer to withhold no taxes at all from their paycheck. Careful! This can backfire big time. Very few people meet the IRS qualifications for a withholding exemption. If you file a withholding exemption, it is likely that you will be stuck with a tax bill at the end of the year. Reflect on Learning: Can your explain what a progressive income tax system is? Can you tell the purpose of a W-4? Can you explain what will likely happen if you direct your employer to withhold no income taxes from your paycheck? PRODUCT PREVIEW Unsliced, please. In the state of New York, an uncut bagel is tax-free, but a cut bagel is subject to an 8 cent sales tax. Fin Lit Trivia Fin Lit Trivia Fin Lit Trivia Tips are Taxed Too If you earn more than $20 a month in tips (also called gratuities ), you are required by law to report them to your employer. Tip income is used to determine payroll tax withholding, and Social Security, and Medicare tax deductions.
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Chapter 5 | Honey, They Shrunk My Paycheck
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