PERSONAL FINANCE

Assignment 4

(October 4)

Purpose: Continue development of the prototype that you will work with throughout the course by beginning to complete a pay stub for the main earner in your Prototype’s family. If your Prototype is self-employed, you can either complete a payroll stub for him/her, assuming an annual salary comparable to his/her annual earnings, or complete a pay stub for another member of the family. For this assignment, you will be completing the items in the pay stub related to withholding of federal, state & local income taxes & payroll taxes (FICA Medicare & FICA Olda Age). Note: Prototypes living in some states & many local areas will not be subject to state or local income taxes & hence, will not have withholding for those taxes.

Resources: Chapter 4 of G&W, Power Point presentation "Human Capital III: The Structure of Compensation..." (including the Houston Prototype’s Paystub Worksheet), sources (especially the IRS site-irs.gov), identified in the Paystub Worksheet Template that you will be downloading from the First Class Conference, Betty's library web page for the course and the U.S. Bureau of Labor Statistics' (BLS) Metropolitan Area Occupational Employment and Wage Estimates at http://stats.bls.gov/oes/current/oessrcma.htm.

You should begin by downloading the “Paystub – Assignment #4” template from the Prototypes folder in the First Class conference. Note you will need to copy this Template into your existing Prototype Master Spreadsheet as you did for Assignment #3 (instructions for doing this are in Assignment #3). You then need to fill out the pay stub items for income tax withholding (federal, state (if relevant) & local (if relevant)) & payroll taxes for the main earner in your family or another family member if the main earner is self employed. (Note: feel free to modify the Pay Stub Template in any way you feel necessary so that it can accurately reflect the earnings and payroll deductions for your prototype.)

At this point, you will be able to calculate accurately many items on the pay stub (e.g., FICA deductions), but will have to estimate withholding for income taxes. This is actually what employers do using their employees' W-4s. You can change your amount withheld after you complete pre-tax deductions on your pay stub and a tax return for your prototype.

For most people, it is best to have your total tax withholding over the year approximate your total taxes due for that year so that you aren’t faced with a large check to write to the IRS (or your state or local government) in April, or penalties for under-withholding. So for this pay stub exercise, you should calculate the amount of Federal tax withholding based on the “wage bracket ” method or "percentage" method. For the Method of Calculating Withholding, see page 3 of the IRS Publication 15-T at: http://www.irs.gov/pub/irs-pdf/p15t.pdf

Be sure to (1) follow example on page 3 for calculating the amount subject to withholding (this amount then is then used to determine withholding from the charts on pages 5-26), and (2) use the correct table from pages 5-26, noting correct payroll period, married vs. single, etc. You can additionally refer to the Houston Prototype’s Paystub example which is in the Prototypes folder in the First Class conference.

Your state and local tax withholding, if applicable (not all states & relatively few localities have an income tax), will have to be estimated based on your prototype’s home state's tax rates & home city's or county's tax rates (if the city or county has an income tax). Your entries on the pay stub for state & local taxes don't have to be perfect at this point, but they do have to be reasonable. You will refine your estimates later in the semester.

Later, after you complete your prototype’s taxes, you will find out whether the Wage Bracket Method or Percentage Method of withholding produces a reasonable amount of withholding for your prototype. For dual career couples & families with income from investments or large bonuses the Wage Bracket Method & Percentage Method leads to under withholding (not enough taxes withheld) while for low-income families it typically leads to over withholding (too much tax withheld). (Recall from the Houston Prototype’s Pay stub that he was not withholding enough and was going to have to go back to his Payroll department and complete a new Form W-4!)

Upload your Master Spreadsheet with the Paystub worksheet addition (your Master Spreadsheet now contians 3 worksheets) and your write up of your paystub work to the Assignment 4 folder in the Econ223-Drop conference in First Class before class on October 4.

Presentation & Financial Advisor Work

Email Econ223-Ask Ann & Saundra by 5PM on October 4 at the latest to request the presenter or Financial Advisor role for this week. Your presentation will be on October 12. If we do not have a volunteer Presenter & Financial Advisor by 5PM on October 4 we will assign students to Presenter & Advisor roles.

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