In the United States, we pay income taxes to the government to pay for things like roads, schools, the military, hospitals, and other government-funded projects. Both businesses and individuals pay taxes on the money they receive. Businesses pay taxes on the revenue they bring in. Likewise, people pay taxes on their income.
The Internal Revenue Service, IRS, is responsible for collecting the federal income tax and enforcing the income tax laws put into place by the President and Congress.
Income taxes aren’t optional. Every person and business in the United States is subject to income tax. That doesn’t mean you’ll actually have to pay income taxes every year. It just means your income could be taxed under certain circumstances. If your income is above a certain level, you must file a tax return, even if you don’t expect to pay any income tax. You’re subject to penalties if you don’t file an income tax return when you’re required to do so by law.
When you owe income taxes, you pay them throughout the year. During your first week of work with a new company, you’ll typically fill out a W-4 or W-9 form. With Form W-4, you indicate your filing status and number of exemptions and the employer withholds the appropriate amount of taxes. Your employer will send taxes to the federal government – and state and local governments, if applicable – on your behalf based on what you filled out on your W-4. As a contractor, you fill out a Form W-9and simply give the company your tax payer identification number (social security number) to report your earnings to the government. You’re responsible for paying your own income taxes to the IRS.
Once the tax year has ended, you file an income tax return with the IRS. If you paid more taxes than you should have during the year, you’ll receive an income tax refund. On the other hand, if you didn’t pay enough taxes, you’ll owe taxes to the government. The taxes you owe from the previous year must be paid by April 15 or you’ll be subject to interest and penalties.
Different incomes are taxed at different tax rates. The tax brackets are: 10%, 15%, 25%, 28%, 33%, and 35%. The higher your income, the higher your tax bracket. For example, in 2021 a single individual’s income that’s less $8,025 is taxed at 10%, while income over $357,700 is taxed at 35%. The tax brackets change from one year to the next. It’s a good idea to check the IRS’ website (www.irs.gov) to find out your tax rate for that year.
You can reduce your tax liability by taking advantage of certain tax benefits that reduce your taxable income. For example, you may be able to claim contributions you’ve made to a charitable organization. Contributing to certain retirement accounts, like a 401(k), can also reduce your taxable income. Keep up with your tax-deductible expenses throughout the year to make it easier for your tax-preparer to file your income taxes. You might be unable to claim certain tax benefits if you don’t have the right records.