Income tax is money the federal government and most states take from your paycheck or business earnings

Income tax is a percentage of the money you earn that goes to the government instead of to you. The federal government collects it, and most states collect it too. Your employer usually takes it out of your paycheck automatically — you see it listed as a deduction. If you're self-employed, you send it to the government yourself, usually four times a year.

The amount taken depends on how much you earn. The more you make, the higher the percentage. But it's not the same percentage for everyone at every income level — the system uses tax brackets, which means different portions of your income are taxed at different rates. A person earning $30,000 pays a different rate than someone earning $100,000.

You don't keep any of the money taken for income tax. It goes to fund federal programs like Social Security, Medicare, roads, military, and other government services. At tax time each year, you file a return to tell the government exactly how much you earned, and they calculate whether too much or too little was taken from your paychecks. If too much was taken, you get a refund. If too little was taken, you owe them money.

Key Takeaways

  • Income tax is a percentage of your earnings that the federal government and most states collect, usually taken directly from your paycheck.
  • The percentage you pay increases as your income increases, using a system called tax brackets where different portions of your income are taxed at different rates.
  • Your employer withholds income tax from each paycheck based on a form you fill out called a W-4, which tells them how much to take.
  • At the end of the year, you file a tax return to report your actual earnings, and the government refunds you if too much was withheld or bills you if too little was taken.

How tax brackets work

Tax brackets are income ranges, each with its own tax rate. You don't pay one rate on all your income — you pay different rates on different portions. For example, in 2024, the federal tax brackets for a single person include a 10% bracket, a 12% bracket, a 22% bracket, and higher ones. This means the first portion of your income is taxed at 10%, the next portion at 12%, and so on.

The brackets change every year because they're adjusted for inflation. They also depend on your filing status — single, married filing jointly, married filing separately, or head of household. Each status has different bracket ranges. A married couple filing jointly reaches higher income levels before moving to the next bracket than a single person does.

The key point is that moving into a higher bracket doesn't mean all your income is taxed at that higher rate. Only the income that falls within that bracket is taxed at that rate. This is why people sometimes worry they'll earn more money and end up with less after taxes — that's not how it works. Earning more always means you keep more, even if some of it is taxed at a higher rate.

Federal income tax versus state income tax

The federal government collects income tax from everyone who earns above a certain threshold. This money funds national programs. Most states also collect their own income tax on top of the federal tax. Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income, not wages).

If you live in a state with income tax, your employer withholds both federal and state taxes from your paycheck. You file both a federal return and a state return at tax time. The rates and brackets are different for each. Some states have a flat tax rate — everyone pays the same percentage regardless of income — while others use brackets like the federal system does.

If you work in one state but live in another, the rules get more complicated. Generally you pay tax to the state where you work, but some states have reciprocal agreements. If you move during the year, you may owe taxes to two states. This is why it matters to know which state you're considered a resident of for tax purposes.

How withholding works on your paycheck

When you start a job, you fill out a Form W-4. This form tells your employer how much federal income tax to take from each paycheck. The form asks about your filing status, how many dependents you have, and whether you have other income. Based on your answers, your employer calculates a withholding amount.

The withholding is an estimate. It's designed to be close to what you'll actually owe at the end of the year, but it's rarely exact. If you claim too many allowances on your W-4, too little is withheld and you'll owe money in April. If you claim too few, too much is withheld and you'll get a refund. You can change your W-4 any time during the year if your situation changes — if you get married, have a child, take a second job, or expect a big change in income.

Self-employed people don't have an employer to withhold taxes, so they send estimated tax payments to the IRS four times a year: April 15, June 15, September 15, and January 15. These payments are based on how much profit they expect to make. If they underpay, they owe the difference plus penalties when they file their return.

What happens at tax time

Between January 1 and April 15 each year, you file a tax return reporting all the income you earned in the previous year. Your employer sends you a Form W-2 showing how much you earned and how much was withheld for federal and state taxes. If you had other income — from a side job, investments, or rental property — you'll receive other forms documenting that.

You use these forms to fill out your tax return, either on paper or using tax software. The return calculates your total income, subtracts deductions you're may have access to to, and determines your tax liability — the total amount of tax you owe. The government then compares this to the amount that was already withheld from your paychecks. If you withheld more than you owe, you get a refund. If you withheld less, you owe the difference.

You can file your return yourself using free software if your situation is simple, or you can pay a tax preparer to do it for you. The IRS also offers free filing through certain partners if your income is below a certain level. The deadline is typically April 15, though you can request an extension to October 15 if you need more time.

Deductions and credits that reduce what you owe

Not all of your income is subject to tax. You can subtract certain expenses and personal situations before calculating what you owe. These reductions come in two forms: deductions and credits.

A deduction reduces the amount of income that's taxed. You can take either the standard deduction — a flat amount set by the government each year that depends on your filing status — or you can itemize deductions by listing specific expenses like mortgage interest, property taxes, charitable donations, or medical expenses. Most people take the standard deduction because it's simpler and often larger than their itemized deductions would be. For 2024, the standard deduction for a single person is $14,600 and for married filing jointly is $29,200, but these amounts change yearly.

A credit is different — it reduces the tax you owe dollar for dollar. If you owe $2,000 in tax and you have a $500 credit, you owe $1,500. Common credits include the Earned Income Tax Credit (EITC) for lower-income workers, the Child Tax Credit for parents, and the American Opportunity Credit for students. Credits are often more valuable than deductions because they directly reduce what you owe rather than just reducing your taxable income.

Who doesn't have to pay income tax

If your income is below a certain threshold, you don't owe federal income tax. The threshold depends on your age, filing status, and type of income. For 2024, a single person under 65 doesn't owe federal income tax if their income is below $14,600. A married couple filing jointly doesn't owe if their combined income is below $29,200. These thresholds are the same as the standard deduction amounts.

However, you may still want to file a return even if you don't owe tax. If taxes were withheld from your paychecks, you need to file to get a refund. If you're self-employed, you need to file to report your income and pay self-employment tax. If you're may have access to to certain credits like the EITC, you need to file to claim them.

Some types of income are not subject to income tax at all. These include certain gifts, inheritances, life insurance proceeds, and workers' compensation. Interest from municipal bonds is also exempt from federal tax, though it may be subject to state tax. Knowing which income is taxable and which isn't is important when calculating what you owe.

Frequently Asked Questions

Why does my paycheck have so many deductions besides income tax?

Your paycheck typically shows federal income tax, state income tax (if applicable), Social Security tax, and Medicare tax. Social Security and Medicare are separate from income tax — they're payroll taxes that fund those specific programs. You may also see deductions for health insurance premiums, retirement contributions, or other benefits you've chosen. Income tax is just one line item.

What's the difference between a tax refund and a tax credit?

A tax credit reduces the amount of tax you owe. A refund is money the government sends back to you after you file your return, usually because too much tax was withheld from your paychecks during the year. You can get a refund without having any credits. Some credits are "refundable," meaning if the credit is larger than the tax you owe, the government sends you the difference as a refund.

Do I have to file a tax return if I didn't earn much money?

If your income is below the standard deduction for your filing status, you don't owe federal income tax. However, you should still file if taxes were withheld from your paychecks, because you'll get a refund. You should also file if you're self-employed, even with low income, because you owe self-employment tax. Some state tax returns are also required regardless of federal filing requirements.

Can I change how much tax is withheld from my paycheck?

Yes. Fill out a new Form W-4 and give it to your employer's payroll department. You can do this any time your situation changes — if you get married, have a child, take a second job, or expect a significant change in income. Changing your W-4 affects future paychecks, not past ones. If you've already overpaid or underpaid for the year, you'll settle that when you file your tax return.

What happens if I don't file a tax return?

If you owe tax and don't file, the IRS can assess penalties and interest on top of what you owe. If you're may have access to to a refund and don't file, you simply don't get the money — there's no penalty, but you lose the refund. The IRS can also file a return on your behalf if you're significantly behind, though it won't include deductions or credits you might be may have access to to. Filing, even if you owe, is better than not filing.