Financial Lit Chapter 5.1 Vocab

Explanation
A share of workers' earnings paid to the government by workers and their employers is called a payroll tax. This tax is specifically levied on the wages and salaries of employees and is used to fund various government programs and social security benefits. It is different from income tax, which is based on an individual's total income, and FICA, which is a specific type of payroll tax that funds Social Security and Medicare programs in the United States.

Explanation
The correct answer is an income tax. An income tax refers to the tax that individuals pay on the income they receive. It is a direct tax imposed by the government on the earnings of individuals or entities, based on their income or profits. This tax is typically calculated as a percentage of the taxable income and is used to fund various government programs and services. FICA, on the other hand, stands for Federal Insurance Contributions Act and refers specifically to the taxes deducted from employees' paychecks to fund Social Security and Medicare programs.

Explanation
The correct answer is the Federal Insurance Contributions Act. This law mandates that both employees and employers make contributions to Social Security and Medicare. It ensures that workers receive benefits upon retirement, disability, or death, and helps fund the healthcare program for elderly and disabled individuals. The Federal Insurance Constitution Act and the Federal Insurance Congratulations Act are not valid laws and do not pertain to the requirement of contributions to Social Security and Medicare.

Explanation
Employer deductions from employee's earnings to pay employees' taxes are called withholdings. This term refers to the amount of money withheld from an employee's paycheck by the employer for the purpose of paying federal, state, and sometimes local taxes. These withholdings are then remitted to the appropriate tax authorities on behalf of the employee. By deducting taxes directly from an employee's earnings, employers ensure that the correct amount of taxes is paid throughout the year, rather than the employee having to pay a large sum at the end of the year.

Explanation
Gross income refers to the total amount of money that a person earns before any taxes or deductions are taken out. It includes all forms of income such as wages, salaries, bonuses, tips, and any other sources of income. This is the amount that an individual or business earns before any expenses or deductions are subtracted. Gross income is important for determining an individual's tax liability and for calculating certain financial ratios or eligibility for certain benefits or programs.

Explanation
Net income refers to the amount of pay an individual receives after all withholdings, such as taxes and deductions, have been subtracted from their gross income. It represents the actual take-home pay that an individual receives and is the amount that they can use for personal expenses or savings.

Explanation
The form that provides information to your employer to determine the proper amount of taxes to withhold from your paycheck is called Form W-4. This form is filled out by employees and includes details such as filing status, number of allowances, and any additional withholding amounts. It helps the employer calculate the correct amount of federal income tax to withhold from the employee's wages. Form W-2, on the other hand, is a document provided by the employer to the employee at the end of the year, summarizing the employee's earnings and the taxes withheld. Form 1040EZ is a simplified tax form for individuals with no dependents and basic tax situations.

Explanation
The correct answer is Internal Revenue Service. The Internal Revenue Service (IRS) is the federal agency responsible for collecting income taxes in the United States. They are responsible for enforcing tax laws, providing taxpayer assistance, and processing tax returns.

Explanation
An allowance is a number that reduces the amount of tax withheld from your pay. It is a specific amount that you can claim on your tax return to lower your taxable income. By claiming allowances, you can adjust the amount of tax that is withheld from your paycheck, allowing you to have more take-home pay throughout the year. This is different from a deduction, which is an expense that you can subtract from your taxable income to reduce your overall tax liability. Subtraction, on the other hand, is a general term that refers to the act of deducting or taking away a certain amount from something.

Explanation
The correct answer is social security and medicare. FICA stands for the Federal Insurance Contributions Act, which mandates that employees contribute a portion of their wages to two specific insurance programs: social security and medicare. Social security provides retirement benefits, disability benefits, and survivor benefits to eligible individuals, while medicare is a health insurance program for individuals aged 65 and older, as well as certain younger individuals with disabilities. Dental insurance is not included in the FICA contributions.