Mathematics for Business and Personal Finance

Chapter 2: Net Income

Business Math in Action

Where Do Your Tax Dollars Go?

You have done the math: the number of hours you worked multiplied by your hourly wage. It should be easy to figure out the amount of your first paycheck, right? The difference, however, between the amount of money you earn and the amount you actually get to take home—your net income—may come as a surprise. Businesses are legally required to withhold the following items from your paycheck.

Federal Income Taxes. The amount of taxes withheld depends upon the amount you earn and the number of exemptions you claim. If you are single, just entering the workforce, have no other source of taxable income, and make $25,000 a year, your federal withholding tax will probably be around $2,000.

State Income Tax. These vary according to state. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state tax. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

Social Security (FICA). This deduction funds the Social Security Administration, which provides income for retired people, the disabled, and survivors of deceased workers.

As of 2008, this is how each federal tax dollar is spent (numbers do not add up to 100 due to rounding):

Federal tax dollars are not distributed according to how many taxpayers live in each state. It is a matter of which state needs what, and how politicians in Washington, D.C. decide how to spend federal money. In the fiscal year 2005, 30 states and the District of Columbia received more in federal tax money than their residents paid, and 20 states received less. For every dollar a taxpayer in New Jersey contributes, that state gets back 61¢, the lowest amount of any state. The state that received the most bang for its federal buck was New Mexico, at $2.03.

English Language Arts/Writing

Federal Tax Dollars