Warm Up Why do we pay taxes? Today…Begin 4.01 1 POB Unit 4.01 – Introduction to Taxes Competency 4.0 Explain the effect and importance of taxes Objective 4.01 Explain taxes on income 2 Part 1: Why Pay Taxes 3 1
Air Traffic Highways Controllers National Defense Road Workers Police Protection Teachers Fire Protection Subsidized school Public Schools lunches Bank Regulations Drug Rehabilitation Programs Job Training Scientific Research Libraries 4 The Government The government provides public goods and services for the community as a whole The government regulated business activities and redistributes income (so that it is “more fair” To pay for these things, the government charges everyone taxes. 5 Vocabulary Public Goods and Services � Benefits that cannot be withheld from those who don’t pay for them and benefits that may be consumed by one person without reducing the amount of the product available for others Taxes � Shift resources from private individuals and businesses to the government in order to pay for public goods and services, regulate the economy, and redistribute income 6 2
Where it Comes From 50% of the government’s money comes from personal income taxes. 35% comes from social security, Medicare, and retirement taxes 7% from corporate income taxes 8% from excise, customers, estate, gift, and miscellaneous taxes 7 Where it Goes 36% of the federal government finds goes to Social Security, Medicare, and retirement 18% to national defense 18% on Social Programs 10% to pay interest on debt 10% on physical, human, and community development 6% to pay down the debt 2% law enforcement, and general government 8 Activity Year Revenue Spending 1950 $39 billion $43 billion 1960 $93.5 billion $92 billion 1970 193 billion $196 billion 1980 517.1 billion $591 billion 1990 1,032 billion $1,252 billion 2000 2,025 billion $1,789 billion 9 3
Activity In what years did the government spend more than it collected? How many times larger was revenue in 2000 than in 1950? How many times greater was spending in 2000 than in 1950? Which grew more – revenue or spending? 10 Activity Answers: � 1950, 1970, 1980, 1990 � About 52 times larger � About 42 times larger � Revenue 11 Warm Up How do you think revenue and spending will change in the future? Objective: Continue 4.01 (Parts 2-3) Explain taxes on Income Complete Tax Simulation Activity on IRS website 12 4
Part 2: Calculating Gross Earnings 13 Payroll Records Payroll is a major expense for most companies and all records must be accurately maintained Payroll is a list of employees and the payments due to each one for a specific pay period 14 Payroll Records A pay period is the amount of time over which an employee is paid � Weekly � Bi-weekly � Semi-monthly � Monthly 15 5
Payroll records The payroll clerk is a person who is responsible for preparing the payroll. The payroll clerk: � Makes sure employees are paid on time � Makes sure each employee is paid the correct amount � Completes payroll records � Pays payroll taxes Mistakes by the clerk can cost a business thousands of dollars! 16 Payroll records A payroll system is the way in which the payroll is paid All payroll systems have certain tasks in common: � Calculates earnings � Calculates deductions � Prepares payroll checks � Reports payroll information to government � Records earnings and deductions in payroll and accounting records 17 Calculating Gross Earnings Gross earnings is the total amount of money an employee earns in a pay period. The calculation of gross earnings depends on the basis an employee is paid An employee’s pay can be based on: � Salary � Hourly Wage � Commission � Salary + commission or bonus � Overtime pay 18 6
Calculating Gross Earnings Salary is a fixed amount of money paid to an employee for each pay period � Mr. Doe is paid a salary of $2,000 a month 19 Calculating Gross Earnings Wage is an amount of money paid to an employee at a specified rate per hour worked. � The number of hours worked multiplied by the hourly wage equals the gross earnings for the pay period � Example: Sally is paid $6.25 per hour. Last week, she worked 36 hours. Sally’s gross earnings are 36 x $6.25 = $245.00 20 Calculating Gross Earnings An electronic badge reader is an identification badge with a magnetic strip that contains employee information used to record starting and ending work hours. � Used to keep wage employees honest about their hours worked. 21 7
Calculating Gross Earnings Commission is an amount paid to an employee based on a percentage of the employee’s sales � Sue is paid a 5% commission on all her sales. Last week, Sue’s total sales were $8,254. Sue’s gross earnings were $8,245 x .05 = 412.70. 22 Calculating Gross Earnings Overtime rate, set by the Fair Labor Standards of 1938, is 1.5 times the employee’s regular hourly rate � John worked 43 hours last week. His hourly rate is $6.60. � Regular 40 x $6.60= $264.00 � Overtime 3 x $9.90= 29.70 � Total $293.70 23 Calculating Gross Earnings Activity: calculate the gross earnings for the following employees 24 8
Calculate Gross Earnings Employee Total Pay Rate Regular Overtime Gross Hours Earnings Earnings Earnings James 33.5 $6.95 Betty 38 $7.80 Bobby 44.25 $8.30 Jean 43 $7.25 John 39.5 $8.30 Kelly 40 $7.50 Nelson 42.5 $9.75 25 Calculate Gross Earnings - Answers Employee Total Pay Rate Regular Overtime Gross Hours Earnings Earnings Earnings James 33.5 $6.95 $232.82 $0 $232.82 Betty 38 $7.80 $296.40 $0 $296.40 Bobby 44.25 $8.30 $332.00 $52.91 $384.91 Jean 43 $7.25 $290.00 $32.63 $322.63 John 39.5 $8.30 $327.85 $0 $327.85 Kelly 40 $7.50 $300.00 $0 $300.00 Nelson 42.5 $9.75 $390.00 $36.56 $426.56 26 PAUSE Worksheet on gross earnings Flashcards Taxes for Teens Chapter 2 27 9
Objective 4.01 Continued… Part 3: Payroll Deductions 28 Deductions Deduction is an amount that is subtracted from gross earnings Deductions required by law: � Federal income tax � Social Security tax � State and local tax Some deductions are voluntary 29 Deductions Federal Income Tax � Most people pay the federal government a tax based on their annual income � Employers are required to withhold a certain amount of money from each paycheck 30 10
Warm Up Who makes more? � Getting a salary of $40,000 a year. � Making $18 per hour working 40 hour weeks. � Making 5% commission on $20,000 average weekly sales. � Hint: There are 52 weeks in a year. 31 Deductions Form W-4 is an employee’s withholding allowance certificate that shows the number of allowances claimed for federal and state income taxes.http://www.irs.gov/app/understandingTaxes/ student/simulations.jsp The amount withheld for federal taxes depends on three factors � Martial status � Number of allowances � Gross earnings 32 Deductions An employee who does not pay federal income tax can be “exempt” from withholding if he: � Did not have a federal income tax liability in the previous year � Expects no tax liability this year � Has income of $700 or less including interest � Cannot be claimed as a dependant on someone else’s tax return 33 11
Deductions If an employee writes “EXEMPT” on form W-4, the employer will not withhold federal income taxes. 34 Tutorials and Simulations •Go to http://www.irs.gov/app/understandingTaxes/student/hows.jsp •Work through Modules 1-7 •Make note of important facts, they are subject to being quiz material 35 Deductions Allowance reduces the amount of income tax to be withheld. � The greater the number of allowances claimed by the tax payer, the lower the amount of income tax withheld from earnings. Tax Table shows the amount to be withheld from the employees each pay period based on their filing status. � http://www.savewealth.com/taxes/rates/single/ 36 12
If Taxpayer's Income Is... Then Estimated Taxes Are... Of the Amount Between But Not Over Base Tax + Rate Over $0 $7,300 $0 10% $0 $7,300 $29,700 $730.00 15% $7,300 $29,700 $71,950 $4,090.00 25% $29,700 $71,950 $150,150 $14,652.50 28% $71,950 $150,150 $326,450 $36,548.50 33% $150,150 $326,450 - - - - - $94,727.50 35% $326,450 37 Example # 1 Kevin Lewis , a single taxpayer, has TAXABLE INCOME of $110,000. Lewis' income falls between: Of the But Not Amount Between Over Base Tax + Rate Over $71,950 $150,150 $14,652.50 28% $71,950 38 Estimated Taxes= Base Tax + (Rate x Amount Over) $14,652.50 + [.28 x ($110,000 - $71,950)] = $14,652.50 + (.28 x $38,050) = $14,652.50 + $10,654.00 = $25,306.50 39 13
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