Module 1: Payroll Taxes and Federal Income Tax Withholding

Educational Standards

State and National Standards

Time Frame

One to two hours

Curriculum Area(s)

• Technology
• Civics/Government
• Family and Consumer Sciences
• History/Social Studies
• Economics

Purpose

To help students understand the withholding of payroll and income taxes from pay.

Objectives

Students will be able to

• identify the types and uses of payroll taxes.
• explain how federal income taxes are used.
• distinguish between gross and net pay.
• describe how employers withhold and remit taxes.
• explain the purpose of Form W-4.

Background

Social Security tax and Medicare tax are types of payroll taxes. Social Security tax, also known as the "Federal Insurance Contributions Act" (FICA) tax, provide benefits for retired workers, disabled workers, and dependents of both. 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 are used to provide for national programs such as (a) national defense; (b) veterans and foreign affairs; (c) social programs; (d) physical, human, and community development; (e) law enforcement; and (f) interest on the national debt. Employers withhold payroll taxes and income taxes from employees' pay. Employees complete Form W-4, Employee's Withholding Allowance Certificate, so that employers know how much income tax to withhold from their employees' pay.

Key Terms

Federal income tax

The federal government levies a tax on personal income. The federal income tax provides for national programs such as (a) national defense; (b) Veterans and foreign affairs; (c) social programs; (d) physical, human, and community development; (e) law enforcement; and (f) interest on the national debt.

Form W-4, Employee's Withholding Allowance Certificate

Completed by the employee and used by the employer to determine the amount of income tax to withhold.

Medicare tax

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.

Payroll taxes

Include Social Security and Medicare taxes.

Social Security tax

Provides benefits for retired workers and their dependents as well as for the disabled and their dependents. Also known as the "Federal Insurance Contributions Act" (FICA) tax.

Opening the Lesson

Hand out Fact Sheet-Payroll Taxes and Federal Income Tax Withholding. Use the following questions to prompt students to share what they know about withholding:

• Can you explain why a worker earns $100 but receives a paycheck for less than $100? (The $100 is gross pay, and the amount of the check is net pay.)
• What happens to the amount earned but not received by the employee? (Some of the difference consists of payroll taxes and income tax withholding. The employer sends these taxes to the federal government.)
• How are payroll taxes used? (Social Security taxes are used to provide for retired workers, disable workers, and dependents of both. Workers, retired workers, and the spouses of both are eligible to receive Medicare benefits upon reaching age 65.)
• How are federal income taxes used? (Federal income taxes are used to pay for national defense; veterans and foreign affairs; social programs; physical, human, and community development; law enforcement; and interest on the national debt.)

Note: Refer students who may want to work independently on this module to Student Lesson-Payroll Taxes and Federal Income Tax Withholding.

Developing the Lesson

Direct students to Tax Tutorial-Payroll Taxes and Federal Income Tax Withholding. Explain that employers use the Social Security tax rate (6.2 percent), the Medicare tax rate (1.45 percent), and the information on Form W-4 to compute the amount to withhold from employee pay. Emphasize that employers do not keep the amounts withheld from employee pay; instead, the employers send the withholding to the federal government.

Concluding the Lesson

After students have completed Tax Tutorial-Payroll Taxes and Federal Income Tax Withholding and Simulation 1-Completing Form W-4, ask them whether they have questions about payroll taxes and income tax withholding. To ensure that they understand the difference between gross pay and net pay, ask the following questions:

• Explain how employees pay Social Security and Medicare taxes. (The employer withholds payroll taxes from employee pay.)
• Explain how the employer knows how much income tax to withhold. (The employer refers to Form W-4 to calculate the income tax withholding.)