Page 572 - Introduction to Business

546 PART 5 Finance

health insurance premiums, and contributions to your retirement plan. When you
look at your paycheck, you are concerned primarily with the bottom line, what’s
called net pay or take-home pay—what’s left over after all deductions.
social security A government program Social security is one of the most significant deductions from your gross pay.
that provides for the economic security Since social security tax is a major deduction, you should know how it is computed
and social welfare of the U.S. worker
and his or her family and what benefits it provides. Virtually every working individual has social security
tax withheld from his or her paycheck. The social security tax was established to
fund a government program that provides for the economic security and social
welfare of the U.S. worker and his or her family.
The social security tax is also known as the Federal Income Contribution Act
(FICA) tax. The FICA tax rate in 2004 was 15.3 percent, of which the Medicare por-
tion was 2.9 percent; thus, the social security portion was 12.4 percent. This tax
amount is divided equally between the employee and the employer. The employee
has 6.2 percent of gross earnings withheld from his or her pay for social security.
The company or employer is responsible for paying the remaining 6.2 percent. The
social security tax is applied to every dollar earned up to a maximum amount called
the base amount. In 2002, this base amount was $84,900. The Medicare portion of
2.9 percent is applied to all earnings (i.e., no maximum amount); one-half of this
amount is paid by the employer and one-half by the employee. Benefits that a
worker may expect to receive after paying the employee’s portion of the FICA tax
during working years fall into four categories:

Old age or disability benefits paid to the individual worker
Benefits paid to the dependents of a retired or disabled worker
Benefits paid to surviving family members of a deceased worker
Lump-sum death payments

IRAs and 401(k) Plans
For most retired persons, social security benefits are insufficient to cover all living
expenses. You should set aside additional funds, such as individual retirement
accounts like IRAs and employer-sponsored plans like 401(k)s. Individual retire-
ment accounts may be set up at a bank or other financial institution, including Web
firms such as E*Trade. Depending on your earnings situation, contributions to a
regular IRA account may be tax deductible. Employer-sponsored 401(k) plans typi-
cally include an employee deduction and an employer-matching component. For
example, a 401(k) plan may include a 6 percent deduction from the employee,
which is matched by a 3 percent contribution from the employer. The money in the
401(k) plan is usually tax-deferred until retirement.

A Will

No one should be without a will. The will is a key vehicle of transfer at death, and its
preparation is often the first step taken by people in planning the disposition of
their estates. A will is a set of written instructions prepared under legal rules that
direct how a person’s property will be disposed of at death. Everybody needs a
properly executed will, and a copy of the will should be kept outside the safe
deposit box. If the only copy is inside the box, it may be impossible for the heirs or
executors to get at it without a lot of time-consuming legal rigmarole.
reality When will you start planning for retirement?
CH ECK

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