Tax Unit: Module 1

Consumer Math Class

East Jackson High School

2015

Module 1: Payroll Taxes and Federal Income Tax Withholding

Introduction Payroll taxes include the

Social Security tax and the Medicare tax.

The Medicare tax is used to provide medical benefits for certain individuals when they reach age 65.

Federal income taxes are used to provide for national programs.

Do you need to file?

Social Security Tax

The Social Security tax is also called the FICA (Federal Insurance Contributions Act) tax.

Social Security taxes provide the following: Retirement benefits Benefits for the dependents of retired workers Benefits for the disabled and their dependents

Medicare Tax

Provides medical benefits for certain individuals when they reach 65.

Individuals eligible: workers retired workers spouses of workers and retired workers

Federal income taxes finance:

National defense, veterans, and foreign affairs

Social programs Physical, human, and community

development Law enforcement Interest on the national debt

Gross Pay and Net Pay

Gross pay = the total amount an employee earns Net pay (Take-home pay) = amount the employee

receives after money has been withheld for: Social Security taxes Medicare taxes Income tax (Federal, State, and/or City) Other withholdings

Employers send the withheld taxes to the taxing authorities.

Payroll Taxes 2014 Payroll Tax Rates

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

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. For 2014, the earnings limit was $117,000, and the maximum Social Security tax was $7,254 ($117,000 x 6.2%). There is no limit on the amount of wages subject to Medicare tax.

Form W-4

Employees complete Form W-4, Employee’s Withholding Allowance Certificate.

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

Withholdings depend on:

The employee’s marital status The number of withholding allowances

claimed by the employee. The more allowances, the less $ withheld.

Any additional amount the employee wants to withhold

Any exemptions from withholding that the employee claims.

Example W-4

ExampleAngela Viviano earns $2,000 a month as a

physical therapist’s assistant. Angela’s net pay is calculated as follows:

Gross Pay $2,000

Social Security (6.2%) -$124

Medicare (1.45%) -$29

Income Tax (per W-4) -$237

Retirement -$50

Net Pay $1,576Her employer sends $390 ($124 + $29 + $237) to

the federal government and $50 to the retirement fund.

Quick Check!____1. Which tax provides for medical benefits?

a. FICA taxb. Federal income taxc. Social Security taxd. Medicare tax

____2. How much income tax do employers withhold from employee pay?a. 6.2% of gross payb. 1.45% of gross payc. 7.65% of gross payd. Employers use the information on Form W-4

to compute income tax withholding.

____3. Net paya. is more than gross pay.b. is also known as take-home pay.c. is gross pay minus 7.65%d. depends on how much the employee wants to pay in Social Security

taxes.

1. Who completed Form W-4? ___________________2. Is the taxpayer married or single?

a. Marriedb. Singlec. Divorced d. Widowed

3. How many allowances does the taxpayer claim? _____4. How much additional tax does the taxpayer want to be withheld? _________

Ahmed Khanb

350

Review Questions

____1. Employees decide when to pay their payroll taxes.a. Trueb. False

____2. Federal income taxes are used to pay the interest on the national debt.

a. Trueb. False

____3. In 2014, the Medicare tax rate was 1.45% of gross pay.a. Trueb. False

____4. Employees use Form W-4 to prove that they are eligible to work in the United States.

a. Trueb. False

Simulation for Module 1Learn how to complete a Form W-4

Your name is Lawrence Red Owl.

You have just recently graduated from college with a marketing degree.

On the 1st of next month you will start your new job as manager of a clothing store in a mall.

You will get a weekly salary plus a bonus based on the store’s sales.

Use the following information to fill out the Form W-4 given in your packet.

Marital Status: Single Children: None U.S. citizen: Yes Dependents other than above: None Social Security Number: 512-00-2213 Address:

5022 Oak Tree Dr. Anytown, US 00001

Congratulations!

You’ve just finished Module 1!

All information came from the Internal Revenue Service Understanding Taxes

Program

http://www.irs.gov/app/understandingTaxes