Economics / Unit 12: Personal Finance
12.1 Earning Income and Reading a Paycheck
Notes
- Gross pay is total earnings before deductions. Net pay ("take-home pay") is what is left after deductions.
- Common deductions: federal income tax withholding, Social Security and Medicare (FICA) taxes, state and local income taxes, health insurance premiums and retirement contributions.
- Forms: a new employee fills out a W-4 to tell the employer how much federal tax to withhold. Each January the employer sends a W-2 showing the past year's wages and taxes withheld. Workers file a tax return (Form 1040), usually due around April 15, and receive a refund if too much was withheld or owe more if too little was.
- A salary is a fixed yearly amount; wages are paid by the hour. A full-time year is about $40 \times 52 = 2{,}080$ hours, so a $41,600 salary is about $20 an hour.
- Worked example: gross pay of $1,200 minus deductions of $110 (federal tax), $91.80 (Social Security and Medicare), $45 (state tax) and $60 (health insurance) leaves net pay of $1{,}200 - 306.80 = 893.20$ dollars.
- Benefits such as health insurance, paid time off and retirement matching are part of total compensation.
Practice
Marco earns $14 an hour and works 25 hours this week. His deductions total $42. What is his net pay?
Gross pay is $14 \times 25 = 350$, and $350 - 42 = 308$.
Which form does an employer send each year showing an employee's wages and the taxes withheld?
The W-2 summarizes a year's earnings and withholding.
A full-time job pays a salary of $52,000 a year for about 2,080 hours of work. What is the equivalent hourly wage?
$\displaystyle \frac{52{,}000}{2{,}080} = 25$.
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