What You Should Know About Taxes

Written by: Haley (she/her)

5 min read | Published: December 31, 2024

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According to a Pew Research Center study, many Americans are frustrated by the complexity of the federal tax system, with about half (53%) saying its complexity bothers them a lot. This makes sense when you consider that the printed edition of the Internal Revenue Code was 4,192 pages in 2022, with income tax law making up over half the pages (2,544). In this article, key tax information will be outlined to provide clarity about how taxes work in the United States and how Americans can file federal taxes.

Tax Definition and Purpose

As defined by Investopedia, the U.S. federal income tax is levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes apply to all forms of earnings that make up a taxpayer’s taxable income, which includes wages, salaries, commissions, bonuses, tips, investment income, and certain types of unearned income. In the United States, federal income tax rates for individuals are progressive, which means as taxable income increases, so does the tax rate. The income ranges that the specific tax rates apply to are called tax brackets. For example, in 2024, if you were a single filer making $60,000 a year, you would have fallen into the tax bracket with a 22% tax rate.

Now that you know what federal income tax is, you may be wondering what taxes are used for. In the United States, federal income tax is used for lots of different expenses, such as building and repairing American infrastructure, improving public transportation, and providing disaster relief. The federal income tax is actually the largest source of revenue for the U.S. government. Federal income taxes are collected by the federal government to help pay for a slew of things, and additional state income taxes are collected by the individual state(s) in which a taxpayer lives and earns income to cover costs that states are responsible for, such as education, health care, and state-owned parks and recreation.

How Taxes Work

Federal income tax must be paid as you earn or receive income throughout the year, either through withholding or estimated tax payments. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. If you are an employee, your employer probably withholds income tax from your paycheck and pays it to the IRS in your name. The amount of tax your employer withholds from your regular pay depends on the amount you earn, the information you give your employer on your W-4 Form, and the Employee’s Withholding Certificate. If you own your own business, you likely make estimated tax payments. You may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return. Be sure to file taxes and make any tax payments required by the deadline for individuals and families, which is typically April 15.

Who Needs to File

Based on information on the IRS website, most United States citizens and most people who work in America need to pay taxes on the income they earn above a set minimum amount. Make sure to do your own research via the IRS website if you are unsure whether you should file a tax return. If you earn wages working for a business, your employer will likely give you a W-2 Form, Wage and Tax Statement, that shows your total income and withholding. If you receive a W-2 Form, you may want to file a tax return because your employer paid taxes for you, and you may owe less tax than you paid.

If you are a gig economy worker, you are still required to pay taxes. The Gig Economy Tax Center provides information so you can stay in compliance with tax laws. If you are self-employed, you will need to pay income tax, which means you will likely be required to file an annual tax return and pay estimated tax every quarter. In addition, you will also need to pay self-employment tax, which is a social security and Medicare tax primarily for people who work for themselves. If you are a business owner, refer to the Small Business and Self-Employed Tax Center to learn more about how to file based on the size of your business.

Information You’ll Need to File

Filing status.
Federal income tax withheld.
The amount of your gross income (or basic information to determine this).
Taxpayer Identification Number (for most people this is their Social Security number).

How to File

You can file electronically through commercial tax preparation software. There are many e-file options, including a Free File option through the IRS. Members and veterans of the U.S. Armed Forces have special tax situations and benefits, including access to MilTax, a program that usually offers free tax return preparation and filing. Businesses must file taxes as well. Some examples of taxes you may need to pay if you own a business include business income tax, employments taxes (if you have employees), and excise taxes. Use the IRS website to determine which business taxes you will need to pay based on the specific details of your business.

Tax Payments and Refunds

If you need to pay your taxes, you can do so online, by phone, or with a mobile device by using the IRS2Go app or visiting the payments page on the IRS website. If you are supposed to receive a tax refund, you can choose to have the refund direct deposited into your account when you file. This limits the chances of your refund being lost or stolen, which is a higher risk if you choose to receive a paper check by mail. Remember to incorporate taxes into your budget at the beginning of the year so you have money set aside to make tax payments or an idea of how you will use your tax refund, such as to pay down debt or build your emergency savings.

In conclusion, the United States tax system is complex and can be daunting at times. It is important to complete research based on your specific circumstances when filing each year. Ask questions and seek help from tax preparers if needed. The IRS can be a great resource if you are having trouble with a specific aspect of filing. Taxes can make up an important part of your finances, and it is crucial to understand how they work and how they can impact you.