Most people and companies that earn money are required by law to pay taxes. Still, it's helpful for taxpayers to understand what taxes are and why they're paying them. Keep reading to learn about the kinds of services and other expenses that taxes fund, what types of taxes people pay, and how taxpayers are supposed to pay up.
What are taxes?
Taxes are payments made by individuals, businesses, and entities to local, state, and federal governments. Yes, there are 3 different levels of the government that may expect you to hand over part of your income. In the United States, paying taxes is compulsory, meaning it's required by law (except for tax-exempt entities). So if you're supposed to pay, and you don't, you may face penalties. More on that later.
How do taxes work?
Each year, individuals and businesses are required to pay taxes on any income earned. For most people, the bulk of that likely comes from payments for goods sold and services performed, whether you're working full-time, hourly, or as a contractor. But it also includes money earned from capital gains (aka, selling assets for a profit), interest, and dividends (periodic payments to shareholders who own certain stocks).
Once you give Uncle Sam his cut of your earnings—through payroll deductions, quarterly payments, or a check or account transfer at tax time—the government uses the money collected to pay its bills and fund a long list of services, including Medicare and Medicaid, public school education, Social Security benefits, roadway maintenance, law enforcement, federal agencies such as the Food and Drug Administration, and, yes, even the IRS itself—plus much more. Most citizens and entities in the US are required to file annual federal income tax returns, as well as the necessary local and state tax returns where they reside or conduct business.
Types of taxes
- Individual income taxes Employers withhold income tax from their employees' pay, then send the withheld money to the federal government. Self-employed folks, such as independent contractors and business owners, are responsible for paying estimated taxes each quarter and filing an annual tax return. Money collected from income taxes is used for national programs, including national defense, law enforcement, and social programs. These funds are also used to pay interest on the national debt. About half of federal revenue comes from these taxes.1
- Payroll taxes The Social Security tax and the Medicare tax (also called Federal Insurance Contributions Act or FICA tax) are also taxes withheld from employees' pay. Funds collected from the Social Security tax are used for retirement and disability benefits. Medicare taxes fund medical benefits for workers, retired workers, and their spouses generally at ages 65 and older. About a third of federal revenue comes from these taxes.2
- Corporate income taxes Businesses are required to pay taxes on their profits. About 7% of federal revenue comes from these taxes.3
- Capital gains taxes Capital gains taxes are levied on profits from the sale of a capital asset, such as stocks and bonds, jewelry, or valuable collectibles. The rate you pay depends on whether you've held the asset for less than or more than a year. The tax rate for short-term capital gains may be higher than for long-term ones. In some circumstances, selling your home may be subject to capital gains taxes. The type of asset you are selling may also play a role in how gains are taxed.
- Property taxes State and local governments often charge a tax on the value of property owned by individuals and businesses. That government-determined value may be larger or smaller than what the owner originally paid for the property.
- Estate taxes Estate taxes may be levied following the transfer of property after a death, if the total value of that property exceeds certain high thresholds. The fair market value, rather than what the original owner paid for the property, determines how much in taxes may be owed.
- Gift taxes Gift taxes are incurred on money or property given away if they exceed a yearly or lifetime limit.
- Sales taxes In some states and localities, a sales tax may be charged with the purchase of a retail good or service. The tax amount is calculated as a percentage of the price point for the good or service.
- Excise taxes Unlike general sales taxes, excise taxes are imposed only on certain goods, services, and activities. Excise tax is usually charged on a per-unit basis, not as a percentage of the price. Excise taxes may apply to cars, fuel, coal, sports wagering, and even indoor tanning services.
When are taxes due?
For those who file once each calendar year, a federal income tax return is usually due April 15 the following year, but the date can change if the 15th falls on a weekend or a holiday. The tax deadline for the 2022 calendar year is April 18, 2023.
How much do you have to make to have to file a tax return?
For single filers who are under 65 at the end of 2022, gross income—or your total income without any deductions taken out—of at least $12,950 requires a federal income tax filing. For single filers 65 or older, gross income of at least $14,700 requires the same. Filing thresholds increase for head of household filers, joint filers, and widows and widowers, as well as those who are blind. Those of any age who are married filing separately may need to report income that exceeds just $5.
Why do I owe taxes this year?
You owe taxes, as required by law, if you generate income over a certain amount, whether through payment from your job, as part of capital gains, or from money or property someone has gifted you. Recently enacted tax changes as well as differences in your tax situation from prior years may mean you owe or are owed a different amount for 2022 than previous years.
How can I file taxes?
The IRS recommends filing federal tax returns electronically through IRS Free File (if your adjusted gross income is $73,000 or less). Other options include tax preparation sites or authorized e-file providers, or through commercial software. You're typically able to file state and local government taxes electronically as well. The IRS does, however, still accept paper returns by mail, and the forms you may need to print are available on IRS.gov. Here's help for deciding how to file taxes.
What happens if I file taxes late?
If you file taxes late, you may incur a failure-to-file penalty and/or a failure-to-pay-penalty, which is calculated based on how late you file and the amount of unpaid tax due.
When will I get my tax refund?
If you file your federal tax return electronically, you can expect to receive your return within 3 weeks of when the IRS receives your forms. Mailed returns may take longer to process. Your refund may arrive faster if you request a direct deposit instead of a paper check.