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Personal Budget Project

SUPPORTING CALCULATIONS

ACCT2102 Spring 2023

GROSS SALARY

Gross salary means your salary before any deductions. In this project, you will calculate deductions for retirement contributions, FICA taxes, federal income taxes, and state income taxes. In addition, you will factor monthly health insurance premiums deductions into your calculations. Your pay after deductions is called your net pay. This is what you “take home.” For gross salary estimates you can use any of the following: salary.com, payscale.com, US Dept. of Labor (BLS.gov), monster.com, simplyhired.com, glassdoor.com, etc. Just a reminder to be realistic. The purpose of this budget is to give you a realistic view of what your finances will look like immediately following graduation. Complete the chart below based on your research. Enter N/A for any cell that is not applicable to your project. Enter the monthly amounts where appropriate on your budget.

RETIREMENT CONTRIBUTIONS

The earlier you start saving, the better. If the company you work for offers a retirement plan, such as a 401(k), the employer will typically match the contributions you make to your retirement plan up to a certain percentage or dollar amount. Annual individual contributions to a 401(k) are limited by the Internal Revenue Service. For purposes of this project, we will assume the annual limit is $23,000.

If you do not work for a company who offers a retirement plan, then you should consider setting up an IRA account. Contributions to Traditional IRA accounts are deductible for tax purposes; contributions to Roth IRA accounts are not deductible for tax purposes. Annual individual contributions to IRA accounts are limited by the Internal Revenue Service. For purposes of this project, we will assume the annual limit is $7,000.

Whatever your choice, for purposes of this project just choose a percentage of your income (say 5%) to contribute to your retirement plan and complete the boxes below. The amount you contribute to your retirement plan is subtracted from your gross salary in calculating your net pay and reduces your taxable income for purposes of federal and state income tax calculations.

Complete the following chart. Enter N/A for any cell that is not applicable to your project. Enter the monthly amounts where appropriate on your budget.

HEALTH INSURANCE

Under employer-sponsored health insurance plans, the cost of health insurance premiums is shared between employer and employee. Health insurance premiums are deducted from your gross salary in calculating your net pay and reduce your taxable income for purposes of federal and state income tax calculations. For purposes of this project, assume an annual health insurance premium of $1,500. Although you may legally remain on your family’s policy until age 26, for purposes of this project, assume you will enroll in your own health insurance plan. Enter the monthly amount where appropriate on your budget.

Dental and vision insurance policies are separate from health insurance policies. However, for purposes of this project, you are not required to research and calculate dental and vision insurance premiums.

TAXES

Tax rules are complicated. The goal of the following calculations is to give you an estimate of your taxes. You will only need to amend your tax calculations if you change either your income or your retirement contributions for your amended budget. The amounts you calculate below, like your retirement contributions, are subtracted from your gross salary in calculating your net pay.

FICA Tax Calculation

The FICA, Federal Insurance Contribution Act, tax consists of Social Security tax and Medicare tax. Both the employer and the employee are responsible for paying FICA taxes. However, only the employee portion is subtracted from gross pay. The employer portion is considered a payroll tax expense. FICA taxes are remitted to the Social Security Administration by the employer.

For purposes of this project, assume the Social Security tax of 6.2% is paid on the first $175,000 of salaries and wages by both the employer and employee. The Medicare tax of 1.45% is paid on all salaries and wages by both the employer and employee. In total, 7.65% in FICA taxes are deducted from your gross pay for the first $175,000 of your salary and wages. Above that salary and wage limit, 1.45% in FICA taxes are deducted from your gross pay. Retirement plan contributions are not deducted from gross salary when calculating FICA taxes. For example, if your annual gross wages are $65,000 and your retirement plan contributions are $3,000, your FICA tax would be calculated as follows: $65,000 x 7.65% = $4,973 (rounded up to the nearest dollar). This amount would be deducted from your gross pay. The employer would “match” this same amount and expense it as a payroll tax expense.

Within the Supporting Calculations Excel file, there is a tab to help you calculate the FICA taxes due based on your gross salary. Use that information to complete the following chart. You will need to amend your FICA tax calculation if you change your gross salary for your amended budget. Enter N/A for any cell that is not applicable to your project. Enter the monthly amounts where appropriate on your budget. Provide a screenshot of your calculations from the Supporting Calculations Excel file to support your FICA Tax calculations.

Federal Income Tax Calculation

The Federal Income tax is only the responsibility of the employee. The employer withholds the tax from the employee’s paycheck and remits it periodically to the Internal Revenue Service. The federal income tax withheld is subtracted from gross pay when calculating net pay.

Use the following chart to determine your federal taxable income. The calculations assume that you will file “single.” You will need to amend your federal income tax calculation if you change your gross salary or retirement contributions for your amended budget. Enter N/A for any cell that is not applicable to your project.

*Interest paid on student loans during the year reduces your taxable income if your annual salary is below a threshold set by the Internal Revenue Service. If your salary is higher than the threshold, you cannot deduct the interest paid on student loans. The maximum deduction available for student loan interest is also limited by the Internal Revenue Service. For purposes of this project, let’s assume the annual salary threshold is $90,000 and the maximum available deduction for student loan interest is $3,000 per year. Since the amount paid is subject to the amount borrowed and the interest rate charged, you will need to look into your personal loan to get details. For purposes of the project, you are not required to provide details related to your loan. However, I encourage you to research how the pay back of your loan is structured, including when payments are due, how much is due, and how much of each payment is principal versus interest. Here’s a good resource to help with interest calculations: student loan interest.

Using the brackets provided in the Supporting Calculations Excel file, calculate your federal income tax and complete the following chart. Enter N/A for any cell that is not applicable to your project. Enter the monthly amounts where appropriate on your budget. Provide a screenshot of your calculations from the Supporting Calculations Excel file to support your Federal Income Tax calculations.

State Income Tax Calculation

The State Income tax is only the responsibility of the employee. The employer withholds the tax from the employee’s paycheck and remits it periodically to the state. The state income tax withheld is subtracted from gross pay when calculating net pay.

To calculate State Income Tax, use the template in the Supporting Calculations Excel file. Although some states don’t impose an income tax, for purposes of this project, we will assume all states do impose an income tax. Enter your Federal Adjusted Gross Income (AGI) in the template and the amount of state tax will be calculated through the template. You will need to amend your state income tax calculation if you change your gross salary or retirement contributions for your amended budget. Enter N/A for any cell that does not apply to your project.

Using the brackets provided in the Supporting Calculations Excel file, calculate your state income tax and complete the following chart. Enter N/A for any cell that is not applicable to your project. Enter the monthly amounts where appropriate on your budget. Provide a screenshot of your calculations from the Supporting Calculations Excel file to support your State Income Tax calculations.

Local Income Tax Calculation

In addition to a state income tax, some cities and counties also have a local income tax. However, for purposes of this project, you are not required to research and calculate local income taxes.

MONTHLY FIXED COSTS AND MONTHLY VARIABLE COSTS

Monthly fixed costs are costs that you must pay regardless of your situation because you are “locked into” a monthly payment. Monthly variable costs are costs that you do have some control over in the short run and that are more easily adjusted each month to fit your situation.

As you prepare your budget, please provide supporting information on how you arrived at the monthly amounts you calculated for the following categories: Rent or Mortgage Payment, Eating Out, and Groceries in the boxes below. Include all sources used to gather information, as well as how the monthly amount was calculated. Enter N/A for any cell that does not apply to your project.

You are not required to provide any details related to the other categories for your monthly fixed and variable costs on your budget. However, I want to encourage you to make your budget as realistic as possible. Research the cost of living in the city where you will live and work. Take time to determine how much your cell phone bill will be once you’re “on your own.” If you plan to get a new car, calculate what you expect the payment to be. Think about your grocery bill and how much you expect to spend on eating out. If you want a pet, consider the costs of caring for it. I don’t expect you to go overboard and do hours of research but spend more time on some of the “bigger” categories to truly make your budget a useful tool for determining your financial position after college. I want this to be a project you “take with you” long after your grade is posted to Athena.

I have included a couple of lines under both the fixed and variable sections labeled “OPEN.” This is just space for you to add any other costs for your budget that I did not capture in my list; however, you are not required to list any additional costs. Make it your own! Budgets are personal and should be a reflection of your life.

PLANNED EXPENSES

There are some expenses that you do not pay for on a monthly basis. However, it is a good idea to save for these “planned expenses” each month to avoid running into a situation where you do not have enough money to cover the expense when it occurs and end up either using your savings or a credit card. For example, let’s say you want to take a summer vacation and expect it to cost $1,200. You would need to budget to save $100 a month for the 12 months leading up to the vacation. In the chart below I have included some items that I consider “planned expenses” but feel free to modify the list. The first line is just an example to show you what I’m looking for in the chart. Complete the chart and enter N/A for any cell that is not applicable to your project. Enter the total monthly amounts where appropriate on your budget.