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.