Income Taxes: What Are They and How Do They Work?

Income tax is used to fund public services, and to pay government obligations and bills, and provide goods for citizens.

The United States government and many states, as well as local governments, levy their own income taxes.

Personal income tax is a type of income tax levied on an individual’s wages, salaries, and other types of income.

How Income Tax Work

The Internal Revenue Service (IRS) collects taxes and enforces tax law in the United States.
The IRS employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc.
The agency collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.

Types of Income Tax

Individual Income Tax

Individual income tax is also referred to as personal income tax. This type of income tax is levied on an individual’s wages, salaries, and other types of income. 

Business Income Tax

Businesses also pay income taxes on their earnings; the IRS taxes income from corporations, partnerships, self-employed contractors, and small businesses.

Depending on how the business was set up, the corporation, its owners, or shareholders report their business income and then deduct their operating and capital expenses.

State and Local Income Tax

Most U.S. states also levy personal income taxes. The states that do not are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

What Percent of Income Is Taxed?

The percent of your income that is taxed depends on how much you earn and your filing status.

The Bottom Line

All tax payers pay federal income taxes depending on your status will determine how much you pay. Most states have an income tax unless you live in one that does not collect state income tax. Choose a licensed and certified CPA to help you with your return and any questions you may have. If you need an income tax loan you can apply for one by clicking here.

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