In order for the government to run;
it needs money.
The government gets its money
by taxing its people.
Taxes pay for all sorts of government
jobs and services.
Federal taxes help pay for national things
like the president, congress,
federal judges, and the military.
State taxes pay
for local roads and the governor.
County and city taxes help pay
for schools, fire trucks, and the police.
Without taxes the government couldn't run
and the country would be in chaos.
So, as much as we don't like paying taxes
doing so is an important part of living
in a society.
A tax is money that the government
collects in order to pay for everything
that the government does.
We work for money, or an income.
And the government takes a portion
of this as a tax.
Payroll withholdings are taken out
of an employee's paycheck
every time payroll is run.
There are federal, state, and sometimes
even local taxes.
Withholding taxes are payroll taxes
where the employer withholds a percentage
of the employee's income for federal,
state, and local income taxes.
Employer taxes are payroll taxes
that are paid by the employer only.
Some payroll taxes like Medicare
and Social Security are shared taxes
that are split between the employer
and employee.
Employers are responsible for payroll
taxes for their employees;
however, employers are not responsible
for managing payroll taxes for contractors.
How are payroll taxes going to affect
how much you see on your paycheck?
The amount on your paycheck before taxes
are taken out is gross pay.
The amount after payroll taxes and other
deductions like benefits is net pay,
also known as take-home pay.
One tax that comes out of your paycheck
is the social security tax.
This tax is meant to help people
when they retire.
Once you're old enough you can start
collecting a social security check.
Until then you will pay a portion and your
employer will also pay into this tax.
Medicare tax comes out
of your paycheck too.
It pays to help people age 65 and over
who are sick and need medical care.
You will pay part and your employer
will also kick some in on your behalf.
In addition,
to the payroll taxes we talked about.
Employers must pay an unemployment tax
for each individual
that works at the company.
This is called state and federal
unemployment taxes.
There are other taxes beside just payroll.
So, let's keep going.
Income tax is what's called
a progressive tax.
Which means that those who make more
money pay a higher tax rate.
If you make very little money, you pay
no income tax at all.
If you make a decent amount of money,
you pay a fraction of it to the government
If you make a lot of money, the fraction
you pay is theoretically higher.
This system is designed this way
because those who have enough money
not to worry about putting food
on the table each day
can afford to pay more to the government.
Income taxes are a percentage of the money
someone makes on their job.
There are different types of income tax
including federal, state, and local income tax.
Federal rates can be anywhere
from 0% to 39.6%
and state rates run from 0% to 13.3%
in some states people can pay over 52%
of their income in income taxes alone.
You report and file these taxes each year
by April 15.
All the money you make during the year
is considered income.
No matter how you make it.
If you work at a job for wages,
that's income.
If you win the lottery,
that's income too.
If you own property like a house, then you
probably have to pay property taxes.
There's often a property tax
from the county and the city.
Property tax is usually a percentage
of the current value of the house.
If you own a $300,000 house
and the tax is 3%,
then each year you have to pay
the government $9,000 in taxes.
These taxes are paid when you make
a major purchase like a car or home.
And again each year based on the value
of the item.
Your home tax may be included as part
of your monthly mortgage payments.
Sales tax is placed on all retail sales
in many areas.
Sometime items like food or clothing
are exempt from sales tax in some places.
Every time you buy something at a store
and they add on the tax at the end,
that's the sales tax.
Sales tax levels vary depending
on where you shop, and what you buy.
Businesses also have to pay
all sorts of business taxes
depending on how much profit they had.
And there are lots of other taxes such as
tariffs on imports, gift taxes,
estate taxes, and unemployment taxes.
If this isn't enough
to make your head spin
don't worry, the current tax code
is over 4 million words long.
No one is going to be reading that!
This is why we depend on tax professionals
and tax programs to help us file our taxes
each year.
Here's the bottom line on understanding
the U.S. Tax System.
Your paycheck won't as big as you think
it should be after all the deductions.
Your new tennis shoes won't cost you what
the price tag says after sales tax is added.
And that brand new car you want will cost
you more than what the invoice says
after you pay the state to own it.
All these pieces should be considerations
when you're budgeting.
When in doubt consult a tax professional
to help you navigate through all the laws.