How Do Taxes Work?


Quick Answer

In the United States, taxes are imposed on the earnings of individuals and corporations at the state and federal level. The amount of tax owed each year is applied on a progressive scale based on the amount of income earned during the previous taxable year.

Continue Reading
Related Videos

Full Answer

The United States utilizes a progressive income tax system, which imposes higher rates to higher earners. Taxes are imposed on all forms of earnings, including funds procured from investments and employment. These taxes are imposed at the federal level by the Internal Revenue Service and at the local level by state governments. State taxes vary based on where the taxpayer lives, conducts business and works.

In 2014, for example, individuals earning in excess of $406, 751 were required to pay a tax rate of 39.6 percent, while those earning between $9,076 and $36,900 were required to pay 15 percent. In 2014, there were seven marginal tax brackets, ranging from a low of 10 percent to a high of 39.6 percent. However, an individual or corporation’s taxable amount can be reduced through various deductions, exclusions, credits and other breaks.

Workers in the United States are subject to a withholding tax. This tax is imposed as a “pay-as-you-go” method, where income is taxed on each paycheck received. At the end of the taxable year, the Internal Revenue Service reviews the amount paid versus the amount owed. If the payments were not enough to cover the income tax owed, the remaining amount must be paid to the IRS. However, if the individual paid more than their owed amount, the IRS sends the individual a tax refund in the following year.

Learn more about Taxes

Related Questions