Income

Lesson Three: Taxes and My Income

The idea of a successful career and a big paycheck is appealing.

What you may not know is that your take-home pay will be Vocabulary
reduced by taxes that are automatically withheld from your Gross annual Net annual
wages, salaries, and tips and paid to the Internal Revenue income (GAI) income (NAI)
Service (IRS) and most state governments. The IRS enforces tax Total pay or Income amount
laws enacted by the U.S. Congress, which is responsible for the earnings made remaining after
nation’s tax system. over a one-year a year’s worth of
period before deductions have
any deductions been taken.
Most everyone who holds a job pays income tax. You, too, need have been
to develop an understanding of taxes and be prepared to deal taken. Net monthly
with their impact on income. Tax knowledge is an integral part of income (NMI)
personal financial management. Gross Amount of
monthly monthly income
income (GMI) remaining after
In this lesson, you will learn about the three main sources of
Total amount of all deductions
tax revenue: income, sales, and property. You will find that U.S. earnings made have been taken
citizens and residents are required to file annual income tax over a month (sometimes
forms and must pay any additional tax owed to the IRS or state before any referred to as
government or apply for a refund if they have overpaid. deductions take-home pay).
(1/12 of GAI).
Social
Finally, you will determine your net monthly income (NMI) using
Income tax Security
income tax and Social Security and Medicare deductions (also A social
A portion of
known as FICA, Federal Insurance Contributions Act). one’s personal insurance
income paid to a system that
As you complete your workbook activities, you also will become government. provides
familiar with the terms gross annual income, gross monthly benefits to most
Medicare Americans who
income, net annual income, and net monthly income.
A social are retired, sick,
insurance or too disabled
Notes: program that to work, and
extends health to families of
coverage to workers who
almost all have died.
Americans age
65 and over. Taxes
Required
payments to a
government.

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 What Are Taxes? Overview
If you earn $10 per hour and work 40 hours a week, you’ll have $400 to spend, right? No. Gross income
(the $400) is different from net income. Net income is the amount you have left after you pay your taxes;
it’s what you actually have to spend.

Taxes are funds, or money, that local, state, and federal governments collect to pay their bills. Taxes, which
are required, pay for the services government provides.

Income tax, sales tax, and property tax are the three main sources of tax revenue.

Many of these services are for things people could not afford individually, such as maintaining an army or
building a highway system. The federal government (sometimes in partnership with states) uses tax money
to pay for programs to help the country and its citizens.

What is federally supported?

• Social Security, Medicare, and other retirement

programs. What is state or city supported?
• National defense, veterans, and foreign affairs. • Public schools
• Interest payments on the national debt. • Local libraries
• Physical, community, and human development • Police, jails, and courts
programs (natural resources, environment,
• Local parks and recreation
transportation, job training, and education programs).
• Social services
• Social programs (Medicaid, food stamps, health
programs, unemployment compensation, and • Firefighters
assisted housing). • Elections
• Law enforcement and government administration • Mass transportation
(federal prisons, FBI, CIA, and the general costs of the
federal government, including the collection of taxes).

Is it preferable to pay for these items with tax dollars or be charged as

each is used? What do you think? o
h at d k?
W hin
t
you

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 What Are Taxes? Overview
Income Tax
An income tax is a tax
on earnings from wages,
salaries, tips, interest,
rents, and capital gains
and dividends from stocks.
It is the largest source of
revenue for the federal
government. Each year on
or before April 15, American
citizens calculate what they
owe in taxes and pay an
amount due (beyond what
was withheld from their
pay) or request a refund.
Federal income tax is
based on the income of
individuals or businesses.
This is called progressive
taxation: The higher the
income, the greater the
percentage paid.
The IRS relies on citizens to
be honest and responsible
about paying their income
taxes. This is called
voluntary compliance.
Income taxes are figured on
a pay-as-you-earn basis;
the tax is an estimated
amount. It is an employer’s
responsibility to withhold
tax from wages and deposit
it with the IRS.
Property Tax
Property taxes are based
on a property’s value. This
Sales Tax includes homes, cars,
Sales taxes are a source commercial buildings, and
of revenue for most state factories. Property value
governments. Each state is determined by local
decides its own sales tax. governments. Property taxes
Counties and cities also are often the primary source
may charge a sales tax. of local government income.
Some items are taxed, and
some are not. Items not Local and state governments
taxed are called use their sales and property
tax-exempt. tax revenues to pay for
services and facilities, such
Some taxable items: as:
• Household items • Public schools and
• Restaurant food libraries
• _____________ • Streets and
• _____________ streetlights
• Police, jails, courts
• _____________
• _____________ • ______________
• _____________ • ______________
• _____________ • ______________
Nontaxable items:
• Groceries*
o
at d k?
• Medicine Fill i
h
W hin nt
• Medical services t blan he
you
• Insurance ks
*Not all states exempt groceries
from sales taxes. Additionally, the
other items listed may or may
not be exempt in some states.
What is taxable in one state may
not be taxable in another.
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 Jason’s Paycheck
Jason has landed a summer job working as a paid intern for a medical research company. His paycheck
shows the deductions from his pay. More than likely, his paycheck will be automatically deposited into his
checking account through direct deposit. See Jason’s sample earnings statement below.

ABC Medical Corporation Period Ending: 06/14/20

1 Corporate Rd. Pay Date: 06/28/20
Anytown, USA 10001

Jason Winters Exemption/Allowances:

555 Pine Court Social Security Number 111-11-1111 Federal: 0
Anytown, USA 10001 Taxable Marital Status: Single State: 0
Local: 0
Earnings Rate Hours This Period Year to Date
Regular $12.00 80.00 $960.00 $960.00
Overtime 00.00 00.00 00.00 00.00 If Jason lived in your state, what
Vacation 00.00 00.00 00.00 00.00
Holiday 12.00 00.00 00.00 00.00
would the state income tax
Gross Pay $960.00 $960.00 deduction be?
_________________________
Deductions: Is there a county tax deduction
Federal Income Tax $114.14 $114.14 where you live?_____________
State Income Tax $42.24 $42.24
Medicare Tax
If yes, what amount would be
$13.92 $13.92
Social Security Tax $59.52 $59.52
deducted from Jason’s paycheck?
_________________________
Other: Calculate Jason’s net pay, given
Health Insurance 00.00 00.00 the deductions for your state.
401K* 00.00 00.00
Transfer to Savings
What is the new amount?
00.00 00.00
_________________________
Net Pay (Checking ACH) $730.18
*Excluded from federal taxable wages

Pay Period Earnings Taxes Other Deposit Number Check Amount

06/01/20 - 06/14/20 $960.00 $229.82 $0.00 1211111111111 $730.18

Tear Here

K
ABC Medical Corporation DATE

HE C
06/28/20

E C $730.18

PL
SEVEN HUNDRED THIRTY DOLLARS AND 18/100

A M
PAY TO THE ORDER OF

S
Jason Winters
555 Pine Court
Anytown, USA 10001
CHECK NUMBER
12345678

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 Paycheck Calculations
Using the information below, calculate each worker’s net monthly income (NMI). GAI is gross annual income, and
GMI is gross monthly income.

Jamal works at the recreation center 15 hours a week during the school year. He earns $8.75 an hour.
In a typical month, he works 63 hours. Calculate his monthly taxes below.

Gross Monthly Income $

Monthly Federal Income Tax (10%) $

Monthly Social Security (FICA) (6.2%) $
Monthly Medicare (1.45%) $
Monthly State Tax (4%) $
Monthly Local Tax (0.1%) $
Total Monthly Deductions $

Jamal’s NMI = $

A college student, Trey works part time for an annual salary of $13,500 a year.

Gross Monthly Income $

Monthly Federal Income Tax (11.6%) $ 168.75

Monthly Social Security (FICA) (6.2%) $ 69.75
Monthly Medicare (1.45%) $ 16.31
Monthly State Tax (4%) $ 45.00
Monthly Local Tax (0.1%) $ 1.12
Total Monthly Deductions $ 300.93

Trey’s NMI = $ 824.07

Marie is a college professor. Her annual salary is $66,000.

Gross Monthly Income $

Monthly Federal Income Tax (18.7%) $

Monthly Social Security (FICA) (6.2%) $
Monthly Medicare (1.45%) $
Monthly State Tax (4%) $
Monthly Local Tax (0.1%) $
Total Monthly Deductions $

Marie’s NMI = $

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