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AGENDA:11:30 –12:30: Budget

Simulation Part 2

12:30-1:00: Federal Tax Introduction

OUTCOMES:1. Define net pay and gross pay2. List the deductions that come

out of each paycheck and the reasons for each deduction

3. Describe how federal taxes, Medicare, and Social Security are calculated

Where does my money go?

Social Security

Used For:1. Retirement Benefits – People who are at

least 622. Disability Benefits – for workers who are

disabled and unable to work3. Survivor’s Benefits – Paid to spouse and

dependent children when a social security recipient dies

4. Some Unemployment Benefits for those who are unemployed

Social Security

How is the amount determined? You and your employer both pay the

Social Security Tax Rate – 6.2%› Only paid on the first $113,700 of salary

Medicare

Used for:› Medicare – Provides hospital insurance for

some disabled people and for people over 65

Medicare

How is this amount determined? You and your employer both pay the

Medicare Tax Rate – 1.45%› An extra 0.9% on all wages earned above

$200,000

Social Security and Medicare

Sometimes Combined under the name: › FICA (Federal Insurance Contributions Act)

State Taxes

State TaxesHow is this amount calculated? In PA, we pay 3.07% of our income

Loal TaxesHow is this amount calculated? In Loyalsock Twp, we pay 1.65% of our

income

Other Optional Deductions Insurance fees (medical, dental, vision) Retirement Plan contributions Union dues Christmas fund Parking fees Etc.

Federal Withholding Taxes Federal Withholding tax – Money

that is deducted from employees wages for income taxes› Amount depends on worker’s wages,

marital status, and number of withholding allowances claimed

› This is a “Progressive Tax” The more you earn, the higher the

percentage you pay

What are Federal Taxes Used for?

Federal Withholding Tax

Withholding allowance – Used to reduce the amount of tax withheld› Claim one allowance for yourself, your

spouse, and each child or dependent

How does an employer know how many allowances you have?› You fill out a W-4 form

W-4 form

Claiming 0 – they take out the maximum amount

Claiming 1+ – they take less out› Claim 1 for you, your spouse, and each

dependant› If you are a dependant, you cannot claim

yourself EXEMPT – some people are exempt for

various reasons› Main reason – you make less than $9,750 a

year

How do these allowances work?

The government gives you a break on each person you are in charge of financially, including:› Yourself› Your spouse› Your children› Elderly Parents› Any other person living with you who is

financially dependant on you

How do these allowances work?

Each allowance that you claim lowers your income by $3,800

You also get to “lower your income” by using one of the following standard deductions:› Single Standard Deduction - $5,950› Married Standard Deduction - $11,900

Tax BracketsSingle Tax Bracket 10% on taxable income from $0 to $8,700,

plus 15% on taxable income over $8,700 to

$35,350, plus 25% on taxable income over $35,350 to

$85,650, plus 28% on taxable income over $85,650 to

$178,650, plus 33% on taxable income over $178,650 to

$388,350, plus 35% on taxable income over $388,350.

Net Pay Equation Gross Pay – Wages earned Deductions – taxes and other fees

taken out Net Pay – Take home pay

Gross Pay – Deductions = Net Pay

Let’s look at an old pay stub…

Practice

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