Work and Income Taxes
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by Megan Heine
| 10 Questions
Students will be able to
  • Explain the purpose of a W-4 and what withholdings mean for your paycheck
  • Identify the elements of the payroll tax, how much they deduct, and where the money goes
  • Complete a W-4
  • Read a paycheck stub and describe the different deductions
  • Explain the tax differences between different types of income (salary vs. wage, earned vs. investment)
What’s a W-4 form?
The moment you get your first paycheck, you’ll also be required to pay your first taxes. The W-4 is the first step in the tax process.
Watch the video and answer the following questions.
  1. What is the purpose of a W-4?
  2. What is a dependent? Do you have any dependents?
  3. Why do you think it can be helpful to have money taken out of every paycheck?
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1
What is the purpose of a W-4?
2
1
What is a dependent? Do you have any dependents?
3
1
Why do you think it can be helpful to have money taken out of every paycheck?
Tutorial: Payroll Taxes and Income Tax Withholding
Once you’ve filled out a W-4, you’ll start receiving paychecks at your new job. However, you’ll only receive some of your overall (gross) pay.

In this tax tutorial, you will learn about payroll taxes and income tax withholding.
Employers withhold payroll taxes and income tax from employees' pay.
Employers send the amounts withheld to the federal government.
Employees complete Form W-4.
Employers use Form W-4 to determine how much income tax to withhold from employee pay.

The Social Security tax is also called the FICA (Federal Insurance Contributions Act) tax.
Social Security tax provides the following benefits for employees and their dependents:
  • Retirement benefits
  • Benefits for the dependents of retired workers
  • Benefits for the disabled and their dependents
The Medicare tax is used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of both are eligible to receive Medicare benefits upon reaching age 65.
Federal income taxes finance:
  • National defense, veterans, and foreign affairs
  • Social programs
  • Physical, human, and community development
  • Law enforcement
  • Interest on the national debt
Employers withhold taxes from employees' pay.
  • Gross pay is the amount the employee earns.
  • Net pay, or take-home pay, is the amount the employee receives after deductions.
The difference between gross pay and net pay is:
  • Social Security taxes
  • Medicare taxes
  • income tax withheld
  • other amounts withheld
Employers send the withheld taxes to the federal government.

Payroll Taxes
Payroll Tax Rates
Social Security tax rate 6.20%
Medicare tax rate 1.45%
Total payroll taxes 7.65%

If an employee earns $1,000, the payroll taxes are:
Social Security tax $62.00
Medicare tax $14.50
Total payroll taxes $76.50
The employer deducts $76.50 from employee's pay and it will be sent to the federal government.

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.
Employees complete Form W-4, Employee's Withholding Allowance Certificate to determine how much federal income tax to withhold.
The amount of federal income tax withholding depends on
  • the employee's marital status,
  • the number of withholding allowances claimed by the employee,
  • any additional amount the employee wants to withhold, and
  • any exemptions from withholding that the employee claims.
Review Form W-4 for Alicia Myers. Notice that Alicia is single and claims one withholding allowance.
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1
Which tax provides for medical benefits?
FICA
Federal Income Tax
Social Security Tax
Medicare Tax
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How much income tax do employers withhold from employee pay?
6.2% of gross pay
1.45% of gross pay
7.65% of gross pay
Employers use the information on Form W-4 to compute income tax withholding.
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1
Net pay
is more than gross pay.
is also known as take-home pay.
is gross pay minus 7.65%.
depends on how much the employee wants to pay in Social Security taxes
Review Form W-4 for Ahmed Khan. Then, answer the following questions by typing your answers in the space provided or by clicking on the correct answer.
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1
Who completed Form W-4?
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Is the taxpayer married or single?
Married
Single
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How many allowances does the taxpayer claim?
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1
What is the additional tax amount the employee want to be withheld?
Lesson Summary
Employers withhold payroll taxes and income tax from employees' pay.
Employers send the amounts withheld to the federal government.
Employees complete Form W-4.
Employers use Form W-4 to determine how much income tax to withhold from an employee's pay.
Simulation: Completing Form W-4 (click on the highlighted title to be taken to the simulation)
Now that you know what happens when you complete a W-4, it’s time to practice.
  1. Review the profile of Lawrence Red Owl and complete his W-4. Make sure to check your answers at each step, and don’t move on until every answer is correct.
  2. List any questions you have in the box at right.

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