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A Comprehensive Guide To Understanding Wage and Income Tax Law In The USA

Samantha Wilson

Jan 20, 2023
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Trying to understand wage and income tax laws in the USA can be an overwhelming task. With so many rules and regulations, it's easy to get confused and frustrated. But don't worry, because this comprehensive guide will help you gain a better understanding of the ins and outs of wage and income tax law in the USA.

Introduction to Wage and Income Tax Law in the USA

The United States imposes a federal income tax on the wages and other income of its citizens and residents. The tax is imposed on both earned income (wages, salaries, tips, commissions) and unearned income (interest, dividends, capital gains). The amount of tax you owe depends on your filing status, your taxable income, and the tax rate in effect for the year.

Income taxes in the United States are levied by the federal government and by most state governments. Some local governments also impose an income tax. The federal government imposes an income tax on the wages and other income of all persons who reside in or derive their incomes from sources within the United States. The states generally follow suit by taxing the incomes of their residents. A few states do not have an individual income tax; instead, they rely primarily on sales taxes and user fees to raise revenue.

Most taxpayers are required to file an annual tax return to determine whether they owe any taxes or are entitled to a refund for any overpayment of taxes. The Internal Revenue Service (IRS) is the agency responsible for administering federal income tax laws.

Filing Your Taxes and Reporting Your Earnings

The United States imposes a federal income tax on the earnings of its citizens and residents. This tax is imposed on both individuals and corporations. The tax is calculated based on the taxpayer's taxable income, which is their total income less any deductions and exemptions.

Individuals must file a tax return every year in which they have earned income. The tax return is used to calculate the amount of tax that the individual owes. Individuals can file their taxes electronically or by mail.

Corporations also must file a tax return every year. The corporate tax return is used to calculate the corporation's taxable income. Corporations can file their taxes electronically or by mail.

Both individuals and corporations must report their earnings to the Internal Revenue Service (IRS). Earnings that are not reported to the IRS may be subject to penalties.

Understanding Taxable and Non-Taxable Earnings

When it comes to wage and income taxes, there are two types of earnings: taxable and non-taxable. Taxable earnings are subject to federal, state, and local taxes, while non-taxable earnings are not.

Taxable earnings include all forms of compensation that are considered taxable under the IRS tax code. This includes wages, salaries, tips, bonuses, commissions, and self-employment income. Non-taxable earnings include things like child support payments, gifts, life insurance proceeds, and certain types of investment income.

The vast majority of people have only taxable earnings. However, if you have any non-taxable earnings, it's important to understand how they're taxed (or not taxed) so you can correctly report them on your tax return.

tax laws in the us

Deductions and Credits You Can Claim

There are several deductions and credits that you can claim when you file your taxes. These can help to lower your overall tax bill and may even result in a refund.

Some of the deductions and credits that you may be eligible for include:

  • The standard deduction: This is a set amount that you can deduct from your income. The amount varies depending on your filing status.
  • Itemized deductions: These are deductions for specific expenses that you have incurred. Examples include medical expenses, charitable donations, and mortgage interest.
  • The earned income tax credit: This is a credit for low- and moderate-income taxpayers who have earned income from employment or self-employment.
  • The child and dependent care credit: This is a credit for taxpayers who pay for child or dependent care so that they can work or look for work.
  • Education credits: There are two education credits available, the American opportunity tax credit and the lifetime learning credit. These can be used to offset the cost of tuition and other education expenses.

Withholding Taxes on Wages

When it comes to withholding taxes on wages, there are a few things you need to know.

First, all employers are required to withhold federal income tax from their employee's paychecks. The amount of tax withheld is based on the employee's filing status and withholding allowances.

Second, employers must also withhold Social Security and Medicare taxes from their employee's paychecks. The amount of these taxes withheld is based on the employee's wage amount.

Finally, some states require employers to withhold state income taxes from their employee's paychecks as well. The amount of state income tax withheld varies by state.

If you have any questions about withholding taxes on your wages, be sure to speak with your employer or a tax professional.

Social Security and Medicare Taxes

When it comes to wage and income taxes in the USA, there are two main types: federal and state. Federal taxes are imposed by the US government and are typically based on your income, while state taxes are levied by individual states and may be based on a variety of factors, including your income, sales, and property taxes.

One of the most important federal taxes is the Social Security tax, which is used to fund the Social Security program. This tax is levied on all wages earned in the United States, up to a certain amount. For 2019, that amount is $132,900. The Social Security tax rate is 6.2%, so if you earn $50,000 per year, your Social Security tax would be $3,100 ($50,000 x 0.062).

Medicare taxes are also levied on all wages earned in the United States. The Medicare tax rate is 1.45%, so if you earn $50,000 per year, your Medicare tax would be $725 ($50,000 x 0.0145).

While most workers have to pay both Social Security and Medicare taxes, there are some exceptions. If you're self-employed, you'll only have to pay the Medicare tax; the Social Security tax doesn't apply to self-employed individuals. And if you're a senior citizen who's no longer working but still collecting benefits from Social Security or Medicare, you won't have to pay any further taxes on those.

Now that you know the income tax laws in the USA, you might have a better understanding of how much would you like to get paid in your next job. Find your next job with Epicareer. We will find you the best-match job according to your skills & experiences.

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