Exercises: Gross, Net, and Taxable Income; W-2 and 1099

Match each term with its description:

• gross income

• net income (take-home pay)

• taxable income

Descriptions:

(a) the amount on which income tax is actually calculated, after deductions;

(b) total pay before anything is taken out;

(c) the amount you receive after taxes and other deductions.

Aiden's paycheck shows gross pay of $\$1{,}200$. Total deductions for taxes and health insurance are $\$270$. Calculate his net pay. What percent of his gross pay was deducted?

Say whether each worker would normally receive a W-2 or a 1099-NEC, and who withholds taxes:

(a) a restaurant server hired as an employee;

(b) a freelance photographer paid $\$3{,}000$ by a client for a project.

Camila's gross wages for the year are $\$38{,}000$. Assume a standard deduction of $\$14{,}000$. Use these simplified brackets: 10% on the first $\$11{,}000$ of taxable income and 12% on the rest.

(a) Calculate her taxable income.

(b) Calculate her income tax.

(c) Explain why her taxable income is lower than her gross income.

Lena spends $\$500$ on a tablet with an 8% sales tax. Separately, she earns $\$500$ at her job, which is subject to 7.65% FICA and 12% federal income tax.

(a) Calculate the sales tax on the tablet.

(b) Calculate the FICA and income tax on the $\$500$ of earnings.

(c) Compare the two and explain how a tax on spending differs from a tax on income.

Ethan earned $\$6{,}000$ doing a summer project. Assume his income tax rate is 12% of this amount (ignore deductions).

• Case 1: he was a W-2 employee and paid 7.65% FICA.

• Case 2: he was an independent contractor with a 1099-NEC and paid self-employment tax of 15.3%.

(a) Calculate his total tax in each case.

(b) Calculate the difference.

(c) Explain why a contractor's tax bill is bigger and what responsibility he has for paying it.

Sofia has these income items for the year:

• W-2 wages of $\$32{,}000$, from which $\$2{,}000$ of federal income tax was withheld;

• $\$4{,}000$ from freelance work (Form 1099-NEC);

• $\$200$ of bank interest (Form 1099-INT).

Assume a standard deduction of $\$14{,}000$ and these simplified brackets: 10% on the first $\$11{,}000$ of taxable income and 12% on the rest. Self-employment tax is 15.3% of the freelance income. Ignore any other deductions.

(a) Calculate her gross income and her taxable income.

(b) Calculate her income tax and her self-employment tax.

(c) Calculate how much she still owes or is refunded after the withholding.

(d) Explain which forms report each item.

Noah earns $\$2{,}500$ gross per month. Each month he puts 5% of gross into a traditional 401(k) and pays a $\$150$ health premium, both taken out before income tax. Income tax is 12% of the income that remains after these two amounts. FICA of 7.65% is calculated on the full $\$2{,}500$.

(a) Calculate his taxable income for the month, income tax, FICA, and net pay.

(b) Recalculate his net pay if he stops contributing to the 401(k).

(c) Argue whether his take-home pay really falls by the full 401(k) contribution, and whether stopping is a good idea.