Federal income tax is a tax imposed by the US Internal Revenue Service (IRS) on yearly earnings of corporations, trusts, individuals as well as other legal bodies. The taxes are placed on all kinds of earnings that form a taxpayer’s taxable income, like their capital gains or employment earnings.
People don’t generally think much about taxes until the tax season arrives. It is perhaps the most dreaded time of the year for US citizens – yet many still highlight it on their calendars. Of course, there is some relief that comes on 15th April when it all comes to an end.
If you have just started earning, or are interested in learning more about income tax, then you came to the right place. In this article, we will discuss all you need to know about your federal income tax obligation. However, if you have a more pressing issue like litigation due to criminal tax charges, income tax audits or tax relief, then it might be best to speak to an income tax attorney for further guidance.
How it works
As mentioned earlier, tax is obtained from corporations and individuals by the state or city in which the entity operates or resides. Once the amount is collected and paid to the city’s or state’s government account, it’s referred to as a federal tax. Federal income tax is what keeps the country or government running.
When you pay your taxes, you’re investing in your economy because the government uses the money to:
- Offer housing and food assistance to the poor
- Repair, build or maintain infrastructure
- Fund the benefits and pensions of government workers
- Boost sectors like health, defense, education, utilities, public transportation, and agriculture
- Offer emergency disaster relief
The federal government gets most of its revenue from the income of its residents.
According to IRS, income tax is taxes on income, both earned and unearned. The US uses a progressive tax system, which means you will pay a bigger share of your income in taxes when you have a higher salary. It’s presumed that you have a greater ability to pay taxes when you have more money than a person is less well-off.
Gross vs net
When you work for a group, organization or yourself, you get paid for the solutions offered – usually with a check, cash or bank transfer. As an employee, you will get your pay as net or gross income. Gross income is the wage or salary paid by your employer prior to any deductions. Net income, on the other hand, is the residual amount of earnings once all deductions have been made from gross pay, such as garnishments, taxes, and retirement plan contributions.
As earlier stated, the federal income tax is the tax deducted from income (which is any money earned, whether as a salary, cash gift from an employer, wage, tips, business income, bonuses, gambling income or unemployment compensation).
When you can’t afford to pay your taxes
Cases of people not being able to pay their taxes are not uncommon. If you find yourself in that situation, the first thing to do is to calm down. It is a stressing position to find yourself in, but you won’t go to prison. Here are some options to consider.
- Get a personal loan from a credit union or bank
- If it’s a smaller amount, you can put it on a credit card
- Create an installment plan with IRS
- Try finding relief from the IRS for the bill
- Take time to analyze these options to establish the one that works for you and your situation.
Tax audits
It’s highly unlikely that you’ll get an audit if you earn between $25,000 and $200,000 – well the chances are less than 0.5% according to this 2018 report. However, if the IRS considers evidence that you are trying to play the system – like rounding your numbers to the nearest zero, mathematical errors on your return, operating a cash business, claiming high business losses and so on – they may request an audit.
Filing a mistake
You should attend to any error as soon as possible. Otherwise, you’ll only owe more in penalties and interest if the IRS discovers. Working with an experienced lawyer can help you avoid mistakes, and also fix any problems that may arise along the way.
