What is federal income tax?

What does federal income tax pay for?

Federal income tax is a primary source of revenue for the US government, funding a wide range of essential programs and services. The money collected from federal income tax helps pay for:

• Infrastructure: Maintenance and development of roads, bridges, and public transportation systems.
• Education: Federal education programs and grants that aid schools and students across America.
• Public safety: Law enforcement agencies, border security, and emergency response services.
• National defense: US military and defense operations.
• Research and development: Scientific research, technological advancements, and public health initiatives.
• Social security: Provides financial support to retirees, disabled individuals, and survivors of deceased workers.
• Medicare: Funds healthcare services for Americans aged 65 and older, as well as certain younger individuals with disabilities.

Federal income tax is also the main source of funding for pensions and benefits for federal government employees.

Who pays federal income tax?

Federal income tax is paid by many different individuals and entities. All American citizens and US residents are subject to pay income tax, though not all are required to file a federal tax return—that depends on their filing status and taxable income (more on this below).

Payroll so powerful it can run itself

See Rippling Payroll

How to calculate your federal income tax

To calculate your federal income tax, you’ll need to know a few key terms:

• Gross income: Total income before any deductions or exemptions.
• Taxable income: Gross income minus allowable deductions and exemptions.
• Federal income tax rates: Apply to taxable income based on income thresholds set by the Internal Revenue Service (IRS). 
• Tax brackets: Different rates of tax applied to different portions of your taxable income. Higher income levels fall into higher tax brackets, resulting in a higher amount of tax.
• Income thresholds: Specific income ranges for which different tax rates apply, adjusted annually for inflation.

Federal income tax brackets

Tax brackets are the ranges of income that are taxed at specific rates. Understanding tax brackets helps taxpayers estimate their tax liability for a given tax year. The IRS updates tax tables annually to account for inflation adjustments.

Federal income tax brackets work as follows:

• The US federal income tax system is progressive, meaning that as your income increases, the rate at which you are taxed also increases.
• Your total income is divided into segments, and each segment is taxed at a different rate.
• By knowing which tax brackets apply to their income, taxpayers can better understand their federal tax liability and plan accordingly.

Below are the published federal income tax rates for different filing statuses as of 2023 (the most recent tax year).

Reducing federal income tax liability

Most taxpayers qualify for credits and deductions that can reduce their tax liability.

Tax credits

Tax credits directly reduce the amount of tax you owe. Some common tax credits include:

• Earned Income Tax Credit (EITC): Designed to benefit low-to-moderate-income working individuals and families.
• Child Tax Credit: Provides financial relief for taxpayers with qualifying dependent children, reducing the tax owed per child.
• American Opportunity Tax Credit: Helps offset the cost of higher education by providing a credit for qualified education expenses paid for an eligible student during the first four years of higher education.

Tax deductions

Tax deductions reduce the amount of your income that is subject to tax, which in turn lowers your tax liability.

Deductions can be taken in two forms: the standard deduction, which is a fixed dollar amount that reduces the income on which you are taxed and is available to all taxpayers, or itemized deductions, which are specific expenses that can be deducted from your gross income. Common itemized deductions include:

• Deduction for State and Local Taxes Paid (SALT): Allows you to deduct state and local income, sales, and property taxes.
• Mortgage interest on a primary residence.
• Charitable contributions.
• Unreimbursed medical and dental expenses that exceed a certain percentage of your adjusted gross income.
• Student loan interest.
• Contributions made to a traditional IRA, subject to income limits and other requirements.

Tax refunds

Tax refunds occur when the amount of individual income tax paid through withholding or estimated payments exceeds the actual tax liability. This results in the IRS returning the excess amount to the taxpayer.

How to file and pay federal income tax

The US tax system is more complex than what you’ll see in many other countries. Instead of sending residents a tax bill, the system relies on many taxpayers to do complex calculations and tax filing on their own—or pay for tax preparation services from professionals.

When filing an income tax return, you can find tax forms and make tax payments at IRS.gov. More specific instructions for different types of workers are below:

W-2 employees

W-2 employees have their federal income tax withheld from their pay and filed by their employer on their behalf. Each tax year, they should receive a W-2 form from their employer, detailing their annual wages and the amount of tax withheld. Here's how W-2 employees file and pay their federal income tax:

1. Employers provide W-2 forms to employees by the end of January, summarizing earnings and taxes withheld.
2. Using the information from the W-2, employees complete Form 1040 (or other relevant tax forms) to report their income and calculate their tax liability. This can be done using tax software, through a tax professional, or by mailing a paper return.
3. If the tax withheld from paychecks throughout the year is less than the total tax liability, the employee must pay the difference when filing their return. Payments can be made electronically through the IRS website or by mailing a check.

1099 contractors

1099 contractors are self-employed individuals who receive 1099 forms from clients, detailing the payments made to them. Because taxes are not withheld from payments to contractors, they typically make quarterly estimated tax payments to the IRS to cover their tax liability for the year. Here's how contractors file and pay their federal income tax:

1. Clients provide 1099 forms to contractors by the end of January, summarizing payments made throughout the previous tax year.
2. Contractors complete Form 1040 to file their personal income tax return, along with Schedule C to report business income and expenses. They may also need to file Schedule SE to calculate self-employment tax.
3. If their estimated tax payments were less than the total tax liability, they must pay the difference. Self-employed individuals must pay both the employer and employee portions of Social Security and Medicare taxes.

Take the pain out of payroll

See Rippling Payroll

Frequently asked questions about federal income tax

What is a marginal tax rate?

A marginal tax rate is the rate at which your last dollar of income is taxed. It refers to the highest tax bracket that applies to your income. For instance, if you fall into the 24% tax bracket, your top tax rate is 24%, meaning each additional dollar earned above a certain threshold is taxed at this rate.

What is an effective tax rate?

The effective tax rate is the average rate at which your total income is taxed. It is calculated by dividing your total tax liability by your total income. This rate gives a clearer picture of your overall tax burden, since it accounts for all the different tax brackets that apply to your income.

When are federal income taxes due?

Federal income taxes are generally due by April 15th each year. This is the deadline for filing your income tax return and paying any taxes owed. If April 15th falls on a weekend or holiday, the deadline is typically extended to the next business day.

What if you need more time to file your taxes?

If you need more time to file your taxes, you can request an extension by filing Form 4868 with the IRS. This extension grants you an additional six months to file your tax return, moving the deadline to October 15th. However, it’s important to note that this extension only applies to the filing deadline, not the payment deadline. You must still estimate and pay any taxes owed by the original due date to avoid penalties and interest.

How is federal income tax different from state income tax?

Federal income tax is levied by the US government and applies to all taxpayers in the country. State income tax, on the other hand, is imposed by individual states and can vary significantly from one state to another. Some states have a flat tax rate, while others use a progressive tax system similar to the federal one. A few states don’t levy any income tax at all. Federal income tax funds national programs and services, while state income tax supports state-level initiatives.

How do you pay federal income tax if you work remotely?

If you work remotely, the process for paying federal income tax remains the same. If you work outside the US, you may need to pay taxes in other jurisdictions, or be eligible for reduced US taxes.

Automate compliance, stateside and worldwide

See Rippling