Understanding the Taxes You Pay

Taxes are important to Americans. These required payments of money help fund vital services for the benefit of all citizens. Included among these services are police, transportation, the justice system, and defense. Taxes also fund services beneficial to only certain citizens. Such programs encompass health, schools, parks, job training, and social services. Without taxes, our country would not be capable of providing the vital and ancillary services that are relied upon by the American people every day.

Income Tax

The 16^th Amendment to the United States Constitution established the right of Congress to impose a Federal income tax. Currently, the US Federal income tax is a progressive tax, with graduated tax brackets that range, in seven taxable income tiers, from 10% to 37%. Earnings thresholds for each tier are adjusted periodically for inflation. Federal income taxes are collected by the federal government based on individual salaries, wages, investments, and other sources of income. Federal income taxes are the federal government’s primary source of revenue. State income tax is levied on income earned in that state, from both residents and non-residents. Some states employ a progressive tax and other states have a flat tax. Income taxes are also a major source of revenue for state governments. For tax year 2023, there were seven states with no income tax.

Payroll Tax

While income taxes fund public services, payroll taxes fund Social Security, Medicare, and other social insurance programs. These other social insurance programs include unemployment insurance, worker’s compensation, and disability. Some payroll taxes are paid by both the employer and employees, and other payroll taxes are paid by the employer only. Employers are responsible for Social Security tax (taxed at a rate of 12.4%) and Medicare tax (taxed at a rate of 2.9%) as well state and federal unemployment taxes. Employees pay half of the Social Security tax and half of the Medicare tax. An exception to the Medicare tax is an additional 0.9% is applied to employees earning more than $200,000 annually. Unemployment taxes are paid by employers at both the state and federal levels. Employees also contribute to unemployment taxes in some states. Self-employed individuals must pay both the employee and the employer portions of Social Security and Medicare taxes. This is otherwise known as the self-employment tax.

Sales Tax

Sales tax is imposed on the sale of goods and services. It is the responsibility of a seller to collect and pay this tax, while purchasers are responsible for paying the tax that sellers must collect and pay. This indirect tax is typically charged as a percentage of the retail cost at the point of purchase. Sales tax is not a federal tax, rather it is a state and local tax. Furthermore, different states and localities establish their own rates.

Property Tax

For those that own property, such as homes, real estate, and land, property tax is an assessed fee based on the value of the property. Proceeds from property taxes are used to fund taxpayer services including public schools, fire departments, police and public safety. Taxpayers in all 50 states and the District of Columbia are subject to property taxes. This tax accounts for a significant portion of every homeowner’s budget.