Getting a job in the U.S comes with its perks; the possibility of realizing the American dream can be exciting. However, just like in other countries, taxes are something you have to deal with as long as you are part of the American workforce.
US citizens pay different forms of tax to the Internal Revenue Service (IRS) including income tax, property tax, business tax, federal tax, sales tax, additional tax, and many other forms of taxation.
One’s tax bill depends on many factors, varies from one individual to the next, and is ideally very complex. Nonetheless, understanding the tax deductions on your income and on your spending is the foundation of financial planning and is critical to securing your financial future.
Have you just gotten a job in the U.S and are wondering how of what you earn will go to the taxman? Here is a comprehensive and simple guide to understanding the taxation system in the U.S.
For employed taxpayers, three types of taxes are deducted from their income; federal tax, medicare and social security tax.
These are the most significant sources of revenue for the federal government and contribute to about 40% of the country’s annual tax revenue. The U.S. income rate taxing system is progressive and is classified into seven tax brackets. (Insert the tax brackets table)
The amount you pay as income tax depends on two main factors; the amount of money you make and your marital status.
As long as your income is above the basic taxable amount, you are eligible for federal income tax. The minimum taxable income depends on one’s age and marital status as follows;
Notably, apart from federal tax, one must pay state income tax. However, seven states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming) do not levy a state income tax. Washington and New Hampshire only tax investment income and capital gains for high-income earn
The social security tax is meant to financially shield people if they lose their income due to retirement, death, or disability. If you diligently pay your social taxes for at least ten years, you or your family will receive monthly benefits once you lose your income.
Both the employees and employers pay these taxes. Employees pay 6.2% of their salary, and the employers also pay 6.2% of each employee’s salary, meaning that the total is 12.4%.
Social security tax is regressive, meaning that the tax rate is uniform for everyone despite their income level.
The tax cap (maximum taxable income) is set by Congress and varies from year to year. In 2022, the tax cap is $147,000. This limit is necessary as it ensures that people do not contribute more than they can receive in benefits.
Medicare taxes provide medical insurance for older people and those with disabilities. Like the social security taxes, both the employees and employers contribute to Medicare taxes. The government determines the medicare tax rates; hence they vary from year to year. In 2022, the total to 2.9% of one’s income, where the employees and employers contribute 1.45% each. However, unlike in social security taxes, there is no tax cap for medicare.
Annually, every American citizen is required to file taxes. If you are employed, you are subject to a withholding tax (a deduction on your salary) where the federal and state income taxes are withheld by your employer, who pays them directly to the Internal revenue service (IRS). Every tax year, your employer gives you a W2 form which has information on your income and the already paid taxes. You then use the W2 to complete other tax forms with details of your other tax returns.
Filing taxes is often a handy task that most people are barely excited about. However, there are now many online tools that can help you ease this task. For instance, if your income is below $73000, you can use the IRS Free files.
As an employee in the U.S, you can earn an earned income credit if you make a low-moderate income (at least below $57,414). Those who qualify for this credit get a reduction in taxes and a refund for any tax withheld.
The amount of credit one gets depends on one’s income, dependents, and filing status. In 2022, one can get credits worth between $560 and $6935. The lower your income, the higher the tax refund is likely to be.
If your income is lower than the minimum taxable income, yet tax was withheld, filing taxes will ensure that the amount withheld will be refunded. It will also allow you to earn an income tax credit, primarily for low-income workers.
The deadline for filing taxes in the United States is 15th April every year.
The taxing system in the United States is progressive. This tax policy dictates that the higher one earns, the more tax they have to pay, and the lower they make, the lower the amount they are taxed.
If you have no income, you can skip filing your returns or you can file zero income
Yes you can pay taxes using your credit card. However, paying tax using your credit card it will cost you while other modes of payment such as bank transfers are free.
Disclaimer: The opinions expressed by Waya are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.