Understanding Taxes …and understanding your paycheck!
Objectives
• Summarize the purpose of paying taxes.
• Recognize the parts of a paystub.
• Differentiate between net and gross income.
• Explain what W-2 and W-4 forms are and what they are
used for.
• Complete a 1040EZ tax form.
Key Terms
• Income – wages received in exchange for labor
• Gross pay – amount of money made before taxes are withheld
• Net pay – amount of money that people receive after paying taxes on their income
• Income tax – tax on the amount people earn
• People who earn more pay a higher percentage of their income in taxes
• Dependents – a Qualifying Child or Qualifying Relative for whom you can claim a tax exemption.
Primary Sources of
Employment
• Hired by a business or an employer
• You are self-employed
Salary vs. Hourly Wage
Salary
• Set amount of $
• Not dependent on number of hours worked
• Example: $30,000/year
Hourly wage
• Specific rate for every hour worked
• Example: $16.00/hour
• WEEKLY
• 52 pay periods a year
• BI-WEEKLY
• 26 pay periods a year
• BI-MONTHLY
• 24 pay periods a year
• MONTHLY
• 12 pay periods a year
Pay Periods
Payroll Deductions
Gross income: Amount of
money earned before payroll
taxes
DeductionsNet incometake home
pay
Mandatory Optional
Taxes - Overview
Income
Payroll
Property
Sales
Excise
Withheld
from
wages
Paid at the
time of
purchase
INCOMEFederal Income Tax
State Income Tax
PayrollSocial Security
Medicare
Insurance
Retirement
Why do we pay taxes?
Internal Revenue Service
(IRS)
• The IRS is the U.S. government agency responsible for
tax collection and tax law enforcement.
Exemptions and
Deductions
• Personal and dependent exemptions for yourself and
qualifying family members reduce the amount of income
on which you will be taxed.
W-4 (Federal)
• Federal Tax
• Allows employers to determine what amount of income tax
they should deduct from each employee’s paycheck based
on that person’s situation
• The IRS recommends that employees submit a W-4 form
• Each year
• Any time their personal or financial situation changes.
• If over the course of the year more of your income than
necessary was withheld, you will receive a refund from the
federal government. If you did not withhold enough
income, you will owe the federal government more money.
W-4 (Federal)
W-4 (Federal)
• Claiming 0 Allowances • Maximum taxes withheld
• Likely to get a sizeable tax refund
• If you are a dependent on someone else’s tax return you should claim 0
• Claiming 1 Allowance• Best option if you are single with one job
• Will likely get a tax refund
• Claiming 2 Allowances • If you are single, claiming two allowances will get you close to your
tax liability but may result in tax due when filing your taxes.
• If you are single and work more than one job, you can claim one allowance at each job or two allowances at one job and zero at the other.
• If you are married, you should claim two allowances
• Claiming 3 Allowances• If you are married and have one child, you should claim three
allowances.
• Additional Allowances
W-4 (Federal)
• What should you claim?
• Give it a try!
W-4 (Iowa)
• Iowa Tax Withholding
Pay Period:
The lengthof time for
which an
employee
earns wages
Reading Your Paystub
Gross Income:
The total
amount of
money earned
before payroll
withholdings
Reading Your Paystub
Payroll Deductions:Items deducted
from gross pay.
Typically around
30%.
Typically include:
• Federal
withholding
• State
withholding
• FICA
Reading Your Paystub
Deductions this pay
period
Accumulated
deductions for the
year
Reading Your Paystub
Net Income:The check
amount that
is often
referred to as
the take
home pay.
Reading Your Paystub
W-2 (Federal)
• The W-2 form is the form that an employer must send to
an employee and the Internal Revenue Service (IRS) at
the end of the year.
• The W-2 form reports an employee's annual wages and
the amount of taxes withheld from his or her paycheck.
W-2 (Federal)
Example
Confused about the W-2?
• http://www.forbes.com/sites/kellyphillipserb/2014/02/11/
understanding-your-tax-forms-the-w-2/#687ff7af4756
1099 (Federal)
• Reports income from self employment earnings, interest
and dividends, government payments, and more.
• Usually provided by a bank or other organization or filled
out by an individual using information from accounts.
• There are several different forms to choose from so be
sure to file the correct forms!
1099 (Federal)
1040EZ / 1040A / 1040
(Federal)
• The IRS Form 1040 is one of the official documents that
U.S. taxpayers can use to file their annual income tax
return (three types).
• The form is divided into sections where you can report
your income and deductions to determine the amount of
tax you owe or the refund you can expect to receive.
1040EZ (Federal)
Step-by-Step
• http://www.wikihow.com/Fill-Out-a-US-1040EZ-Tax-
Return
• Let’s try to together!
• Income: $40,000
• Taxable Interest: $500
1040 IA
(Iowa)
• IA taxpayers can use to file their annual income tax return
• The form is divided into sections where you can report
your income and deductions to determine the amount of
tax you owe or the refund you can expect to receive.
How to File
• Paper copy – mail in (FREE)
• Online copies – mail in or submit electronically (FREE)
• H&R Block – Software ($40)
• Asks basic questions
• Helps to fill out form
• Adds/subtracts for you
• Accounting Firm ($100+)
What You Need!
• Personal Information (Tax-Related Information)
• W-4 Form (Federal Tax Withholding Form)
• W-2 Form (Federal Income Information)
• 1099 (Federal Savings Account Interest)
• 1040EZ (Federal Tax Filing)
• IA W-4 Form (Iowa Tax Withholding Form)
• W-2 Form (Federal Income Information)
• 1040 IA (Iowa Tax Filing)
• YOU MAY NEED MUCH MORE!
Resources
• https://tax.iowa.gov/
• https://www.irs.gov/
• Iowa Tax Table
• https://tax.iowa.gov/sites/files/idr/forms1/2017TaxTables.pdf
• Federal Tax Table
• https://www.irs.gov/pub/irs-pdf/i1040ez.pdf
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