Income, Taxes, and Employment
What this domain tests
Income, Taxes, and Employment covers how pay is calculated, what is withheld, and how income tax actually works. Expect gross versus net pay, W-4 and W-2 forms, FICA, overtime, filing status, and marginal versus average tax rates.
Core rules
- Gross pay is hours times rate. Net pay is gross minus mandatory deductions (federal income tax withholding, FICA, state tax) and voluntary ones (health premium, 401(k)).
- FICA is 7.65% for most employees: 6.2% Social Security plus 1.45% Medicare. Your employer matches it.
- The W-4 sets withholding; the W-2 reports annual wages and withholding. A 1099-NEC goes to independent contractors, who owe the full 15.3% self-employment tax plus income tax and generally make quarterly estimated payments.
- FLSA overtime: non-exempt employees earn 1.5 times the regular rate for hours over 40 in a workweek.
- Income tax is progressive: each bracket rate applies only to income inside that bracket.
Worked example
Assume brackets of 10% to $10,000 and 12% above. Taxable income $30,000: 10% of $10,000 = $1,000; 12% of $20,000 = $2,400; total $3,400. Average rate = 3,400 divided by 30,000 = 11.3%; marginal rate = 12%. An extra $1,000 of income is taxed $120, not $2,400 - a raise cannot reduce take-home pay by pushing you into a higher bracket.
Traps
Calling a tax refund a bonus: it is your own overwithheld money returned interest-free. Assuming all income is taxed at the marginal rate. Forgetting that 1099 income carries both halves of FICA. Claiming overtime when you are classified as exempt.