Individual Income Tax Formula
Total income (Everything received)
- Exclusions/tax-exempt income
= Gross Income
= Adjusted Gross income (AGI)
- Greater of Standard or Itemized Deductions
- Personal and dependency exemptions (3300 in 2006)
= Taxable income (TI)
* Tax rate (10%-35%)
= Tax Liability
- Tax Credits
- Tax Payments
= Tax due or refund
-Employers must withhold all federal, state, and local taxes out of an employees
paycheck and issue them a W-2 at the end of the year that shows the break-downs.
-An independent contractor’s payroll does not include the withholdings.
must issue a FORM 1099-MISC income, which the contractor must report as business
-Fringe Benefits are tax exempt benefits employers can have in their payroll.
include paying for medical, daycare, life insurance.
-Self-employed people do not receive this benefit.
You cannot pay yourself for
Instead it is considered personal expense.
-Stock Options: If employee is offered 2,000 shares at a price of 30 (60,000) and the price
is up to 75/share (150,000) he will exercise the option.
When this happens he now has a
tax bases of 150,000, 60,000 of out-of-pocket and income of 90,000 (negative cash flow)
-Incentive Stock Options (ISO): these are qualified for tax-exemptions at the exercise
The employee will not record income until they are sold.
Exercise of option:
Tax at 35%
Bases of 2,000
Sale of stock:
Tax cost 15%