Pay Stubs Discussion Presentation Lesson: Pay Day

Gig Economy

  • The gig economy involves people finding work and getting paid for specific tasks or projects rather than traditional hourly wages or salaries.
  • Technology has significantly enabled the gig economy, allowing entrepreneurs and small businesses to reach more customers efficiently.
  • Apps facilitate connections between those needing services and those willing to provide them.
  • Examples of gig-economy tech companies include Uber, Etsy, and Lyft.

Independent Contractors vs. Employees

  • In the gig economy, workers are often classified as "Independent Contractors."
  • Contractors receive a 1099 tax form at the end of the year, documenting their income.
  • Most workers are still classified as "employees."
  • Employees receive W-2 forms, itemizing their income and deductions.

Understanding Form 1099-NEC

  • Form 1099-NEC is used to report nonemployee compensation.
  • It includes the payer's information (name, address, TIN), recipient's information (name, address, TIN), and the amount of nonemployee compensation.

Understanding Form W-2

  • Form W-2 is a wage and tax statement given to employees.
  • It includes information about wages, federal income tax withheld, social security wages and tax withheld, medicare wages and tax withheld, and other compensation and benefits.

Gross Pay

  • Gross Pay is the pay before taxes and other deductions.
  • Wages: Minimum wage is the lowest pay rate allowed by law for each regular hour of work.
  • Overtime Pay: Full-time employment typically consists of 40 hours a week. Any hours worked beyond 40 are considered overtime, paid at 1.5 times the normal rate (time and a half).
  • Example: Kyle worked 46 hours, earning 15.00/hour.
    • Regular pay: 40 hours * 12/hour = 480
    • Overtime rate: 12 * 1.5 = 18
    • Overtime pay: 6 hours * 18.00 = 108.00
    • Total Gross Pay: 480.00 + 108.00 = 588

Pay Stubs

  • Employees are typically paid at regular intervals, with a pay stub created for each pay period.
  • A pay stub itemizes earnings and includes all deductions.
  • Key components: Gross Income, Net Income, Deductions

Pay Stub Example Details

  • Includes employee information (name, Social Security ID, employee ID), check number, pay period, and pay date.
  • Details income (rate, hours, gross wages) and deductions (FICA, federal tax, state tax, SDI).
  • Shows current totals and year-to-date (YTD) amounts for gross wages, deductions, and net pay.

Deductions

  • A deduction is an amount of money an employer withholds from an employee's paycheck.
  • Common deductions include taxes, health insurance premiums, and 401(k) contributions.

Types of Deductions

  • Federal Income Tax: Funds the federal government's budget.
  • State Income Tax: Funds the state government's budget.
  • Health Insurance Premiums: Covers the cost of health insurance for the employee and their family; employers may contribute to lower costs.
  • 401(k) Contributions: Employer-sponsored retirement savings plan; employers often match pre-tax contributions.
    • Company-matched funds are essentially free money, so maximize contributions.
  • FICA (Federal Insurance Contributions Act): Funds Social Security and Medicare.
  • FUTA
  • SUTA

FICA Details

  • FICA requires employers to withhold payroll tax on employees’ income and contribute an equal amount.
  • Funds Social Security and Medicare programs.
  • Breakdown:
    • Social Security Deduction: 6.2%
    • Medicare Deduction: 1.45%
    • Total FICA Deduction: 7.65%

Pay Stub Example

  • Imagine a Pastry Chef at Tonya’s Bakery earning 45,000 per year.
  • Paid bi-weekly (every other week):
    • 45,000 / 26 = 1,730.77 every two weeks.
    • 1,730.77 is the gross income, or gross pay, or gross earnings.

Federal and State Income Tax (Example)

  • Federal Income Tax:
    • Varies based on tax bracket and dependents.
    • Example: 6% of gross income.
  • State Income Tax:
    • Varies depending on the state.
    • Example: 3% of gross income.
  • If you haven’t paid enough tax, you will owe more money when filing taxes with the IRS each year. However, if too much tax was withheld, then you will receive a tax refund.
  • For this example, the total amount of federal and state taxes is 9%.

Additional Example Deductions

  • 401(k):
    • Example: 5% of gross income.
    • Contribute the maximum amount allowed to earn free money through company matching programs.
  • Net Income:
    • Subtract all deductions from the gross income.
      • Example: 1,200.29 is the net income every two weeks, or net pay, or net earnings (take home pay).

Pension Definition

  • Pension: An employer funded plan that provides for a defined amount of income for employees after they retire from the company.