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In this podcast, we’re exploring Lesson 5 “Honey, They Shrunk My Paycheck.” This topic fits within our Unit 1 theme of Earning an Income. In this lesson, we’ll explore paychecks, actually paycheck taxes and withholding — all of those deductions that shrink your paycheck! We’ll also explore some common IRS employee forms, and learn how to decipher a typical paycheck stub with all those crazy looking codes. This lesson begins on page 80 of the Instructor’s Guide, so let’s turn to it now.
Let’s look at the Supplemental Resources. The Instructional Resource for this lesson is the Internal Revenue Service’s withholding calculator, which you will use to demonstrate how to complete an IRS Form W4. That’s the form new employees get that tells their employer how much to withhold in taxes from their paycheck which we’ll talk more about in the lesson.
The online resource is bankrate.com. This is a really good site, it’s kind of a onestop-shop for all kinds of diferent financial calculators. As you know, financial calculators come pre-loaded with formulas for making particular kinds of calculations. Bankrate.com has a variety of financial calculators. It has a mortgage calculator, investment calculator, credit card calculator, home equity calculator, basically anything or any kind of calculation you or your students might need to help you manage personal finances.
What Does That Mean? is our vocabulary list, and it’s on page 81. This lesson has 14 vocabulary words, which are not hard to understand. The terms are all related to taxes and withholding, but If you can turn to page 85 for a second, you’ll see that in this lesson, students also learn some payroll code. I’m sorry, but I did not include the payroll codes in the vocabulary list because I just didn’t think to do that when I was writing this lesson, but you might want to select a few payroll codes to include in the vocabulary quiz, such as YTD which is yearto-date or garnish.
Turning to Gaining Attention on page 82, this really repeats the question from the last Ponder and Predict. Why is the paycheck received so much less than you anticipated? Where does the money go? Students who have a job or students who’ve done the reading will be able to answer this. A lot of money is deducted from an employee’s paycheck for taxes and withholding before any money reaches the employee’s hands.
The Presentation of Content begins with a little disclaimer, this course is not intended to provide any tax or financial advice. Students should understand and just accept on faith the fact that the US tax code is very complicated. One of the benefits of being financially literate is to know when you don’t know. In other words, to know when you may be in over your head. Understanding the US Tax Code and working it to your financial benefit is one of those areas where it’s probably not good to go at alone, especially when you start making a little money. There are plenty of good qualified experts, accountants and financial planners who can help with minimizing the amount of money you pay in taxes and maximizing the financial benefits that you get from your employee benefits. A financially literate person seeks out expert advice and takes advantage of other’s people’s knowledge.
In the Presentation of Content, the first thing we look at are paycheck deductions. There are basically two kinds, withholdings for taxes which we explore in Roman Numeral 1, and deductions for paying for the employee benefits, which we explore in Roman Numeral 2. In short, there are a lot of taxes withheld from our paychecks. By far, the biggest chunk of withholding is for federal income taxes. Everyone has to pay these. There is no option and an employer is required by law to withhold these taxes from an employee’s paycheck. Exactly how much an employer withholds is discussed later in this lesson.
State taxes are also withheld in all but 7 states. Students will also recall, from the last lesson, that Social Security taxes are withheld from a paycheck. 6.2% of an employee’s pay is taken right of the top of the paycheck for Social Security and the the employer matches another 6.2%. Remember these are not held in an account especially for the employee. This money goes into the Social Security fund and is paid out in current benefits to current social security recipients. You can read about the other type of taxes that are withheld from a paycheck. These are on page 83.
In the middle of page 83, we ponder the all important issue of withholding just the right amount of taxes from your paycheck. If you withhold too much, your paycheck will be unnecessarily skimpier than it should be. If you withhold too little, you may have more take home pay, but you’re going to have to pony up more money to IRS at the end of the year and that’s not fun. The US taxes are progressive, which means that people are put into diferent tax brackets depending on how much they earn. Your tax bracket tells you how much you have to pay in taxes. For example, you can be in 15% or 23% or 30% tax bracket. The more money you earn, the higher the percentage of your income you will pay in taxes. That’s what’s meant by progressive tax.
Regarding withholding of income taxes, students should understand that the employer doesn’t decide how much to withhold from an employee’s paycheck. The employee is responsible for the telling the employer how much to withhold. This is done through the IRS W4 Form — Form W4 Withholding. An employee receives this form when they start a job. The W4 is to make sure that, over the course of 26 pay periods, you set aside just the right amount of federal income taxes so that at the end of the year you don’t have any left to pay.
On page 84 and in the student workbook, there’s a copy of a W4. Students can see exactly what one looks like. There are also instructions on how to demonstrate completing the W4 using the IRS withholding calculator, so you can show students how to figure out what their correct withholding amount is when they start a job. One thing they don’t want to do is claim to be exempt from withholding. That can result in a lot of trouble and you can read about that on top of page 84.
A few other IRS forms are discussed on page 84. Let’s move to Roman Numeral 2, Deductions for Employee Benefits. As students will recall from the last lesson, some employee benefits are paid for by the employer. Some are paid for by the employee and the employer — the cost is shared. The employee’s portion of payment for their employee benefits is deducted from their paycheck every pay period. This is a good place in the lesson to revisit the one of those benefits of benefits — the fact that many of the benefits that the employee pays for are paid in pre-tax dollars. Remember that has the benefit of reducing their taxable income. On page 85, you can read about deductions that are typically taken out of an employee’s paycheck.
So moving down page 85 to roman numeral 3, How to Decode a Paycheck Stub. Most paychecks these days are received via Direct Deposit, but some are still manually handed to an employee. Either way, an employee will always receive a paycheck stub which itemizes all the details of the employee’s pay and everything that was withheld for taxes and deducted for benefits. It’ll also include the year to date stats: what the employee has earned year to date or had deducted or withheld year-to-date. Paycheck stubs should be reviewed and saved in a drawer or file because at the end of the year, when you prepare your taxes, you’re probably going to need them. Paycheck stubs, however, are often ignored. That’s probably because they look like they’re written in code and hard to understand. They actually are written in code, payroll code. Payroll code is just a bunch of acronyms and abbreviations for diferent types of earnings, withholdings, and deductions. Some typical payroll codes, acronyms, and abbreviations are shown on page 85 which your students can learn and they’re actually going to use these codes in a lesson activity when they decipher a paycheck stub.
Moving over to page 86, we have The Big Picture which is our read aloud of the key points of the lesson. Under Let’s Practice, we have Activity A, Help Henry Decipher the Deductions. That’s where students decipher Henry’s paycheck stub using the payroll code that we just saw on page 85. I realize that many of your students won’t have a paycheck for many, many years, so we can think “oh well, why should they learn this now?” They really don’t have to come away from this lesson with a deep and permanent memory of all these payroll codes, but what we want is that they understand that a) there are lots of deductions from a paycheck; and b) that when they do get a paycheck they will get a paycheck stub, which they should review and save — and that c) those payroll codes that are on the paycheck stub actually explain the paycheck shrinkage.
Activity B is Fun with IRS 1040EZ. This is an easy form federal tax return, the kind that students will use when they get their first job or during their early years of employment. The directions are very simple. This activity walks students through completing a 1040EZ to discover whether they get a tax refund or they have to pay more in taxes.
Activity C is the Debate, Persuade, Inform activity. This explores the Flat Tax Controversy. The US is historically a progressive income tax country, but every year they banter about the notion of converting our progressive tax to flat tax by chucking the tax code so everybody just pays a flat tax. There are proponents and opponents of this argument so students’ assignment is to study each side and come up with an argument for one or the other. The curated tech for the activity is Prezi at prezi.com. This is a software program that enables students to make beautiful slide presentations. Being able to make an attractive and informative slide presentation is a good college readiness skill.
On page 87, the next lesson Ponder and Predict asks students to consider whether they’ve ever thought of pursuing a career overseas. What might it be like to work overseas? What are the opportunities and what might be some of the challenges of working overseas?
Moving to the Blog Q, this question relates back to the local tax deducted from paychecks. Most local taxes have to have voter approval for the particular item the tax is paying for. This asks students what kind of services or projects would get their approval and what wouldn’t. Alright, that’s it for this podcast. Thanks for joining me. I’ll see you on our next podcast where we look at Lesson 6, “The Global Employee.”