Income tax is a percentage of your earnings that goes to federal, state, or local government

Income tax is money taken from your paycheck or calculated on your yearly earnings and sent to the government. The amount depends on how much you earned that year. Federal income tax goes to the U.S. government. Most states also collect income tax. Some cities do too. The tax rate changes based on your income level — people who earn more pay a higher percentage.

Your employer usually takes income tax out of each paycheck automatically, so you never see that money. If you're self-employed, you pay it yourself, typically four times a year. At the end of the year, you file a tax return that calculates exactly how much you owed. If too much was taken out, you get a refund. If too little was taken, you owe the difference.

Key Takeaways

  • Income tax is a percentage of your earnings sent to federal, state, or local government, and the rate increases as you earn more money.
  • Your employer usually removes income tax from your paycheck before you receive it, or you pay it yourself if self-employed.
  • Tax brackets determine your rate — you don't pay one flat percentage on all your income, but different percentages on different portions.
  • Filing a tax return each year reconciles what was actually owed against what was already paid, resulting in a refund or a balance due.
  • Deductions and credits can lower the amount of income tax you owe by reducing your taxable income or the tax itself.

How tax brackets work

The U.S. uses a progressive tax system, which means your income is divided into brackets, and each bracket has its own tax rate. You don't pay one rate on all your income. Instead, you pay the lowest rate on the first portion, a higher rate on the next portion, and so on.

For example, in 2024, the federal brackets for a single person start at 10% on income up to about $11,600, then 12% on income from $11,601 to $47,150, then 22% on the next portion, and higher rates on higher portions. If you earn $50,000, you don't pay 22% on all of it — you pay 10% on the first $11,600, 12% on the next $35,550, and 22% on the remaining $2,850. Each state sets its own brackets and rates, which vary widely.

Your tax bracket also depends on your filing status: single, married filing jointly, married filing separately, or head of household. Each status has different bracket thresholds. Married couples filing jointly typically have higher income thresholds before moving to the next bracket, which is one reason married filing jointly often results in less total tax.

What gets withheld from your paycheck

When you start a job, you fill out a W-4 form that tells your employer how much federal income tax to remove from each paycheck. The form asks about your filing status, number of dependents, and other income. Based on your answers, your employer calculates a withholding amount.

The withholding is an estimate. Your employer doesn't know your exact tax situation — they don't know if you have a second job, investment income, or deductions you'll claim. That's why the amount withheld is often more or less than what you'll actually owe. If you want to adjust your withholding during the year, you can submit a new W-4 to your employer at any time.

Some people claim "exempt" on their W-4, which means no federal income tax is withheld. This is only legal if you had no tax liability the previous year and expect none this year. Most people should not claim exempt. If you do and you actually owe tax, you'll have a large bill due on April 15.

Self-employment tax versus income tax

If you're self-employed, you pay both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare — the programs that salaried employees and employers split. As self-employed, you pay both portions yourself, which is roughly 15.3% of your net earnings.

You also owe federal income tax on your self-employment income, calculated the same way as for salaried workers. You estimate your total tax liability for the year and make quarterly payments (usually April 15, June 15, September 15, and January 15). If you underpay, you may owe a penalty. If you overpay, you get a refund when you file your return.

Self-employed people can deduct business expenses — supplies, equipment, home office, vehicle mileage — which reduces taxable income. Keeping good records of these expenses is essential, because the IRS may ask for proof if you're audited.

Deductions and credits that lower your tax

A deduction reduces your taxable income. You can take the standard deduction — a flat amount set by the IRS each year — or itemize deductions if your specific expenses add up to more. In 2024, the standard deduction for a single person is about $14,600 and for married filing jointly about $29,200. These amounts change yearly.

Common itemized deductions include mortgage interest, state and local taxes (up to $10,000), charitable donations, and medical expenses above a certain threshold. If your itemized deductions total more than the standard deduction, you itemize. Otherwise, you take the standard deduction.

A tax credit is different from a deduction — it directly reduces the tax you owe, dollar for dollar. The Earned Income Tax Credit (EITC) is a major credit for lower-income workers. The Child Tax Credit gives $2,000 per may have access to child. The American Opportunity Credit helps with education expenses. Credits are more valuable than deductions because they reduce your actual tax bill, not just your taxable income.

Filing your tax return

You file a tax return each year by April 15 (or the next business day if April 15 falls on a weekend). You report all income from the previous year — wages, self-employment income, interest, dividends, rental income, and other sources. Your employer sends you a W-2 form by January 31 showing wages and taxes withheld. If you have self-employment income, you calculate it yourself.

You can file on paper or electronically. Most people file electronically because it's faster and the IRS processes it more quickly. You can file yourself using tax software, hire a tax preparer, or use a free filing service if your income is below a certain threshold (usually around $79,000 for 2024, though this varies).

When you file, you report your income, claim deductions or credits you're may have access to to, and calculate your total tax liability. You compare this to what was already withheld or paid. If you overpaid, you get a refund. If you underpaid, you owe the difference. The IRS typically processes refunds within 21 days if you file electronically.

State and local income tax

Most states collect income tax using the same bracket system as the federal government, though rates and brackets differ by state. Nine states have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). If you live in a state with income tax, your employer withholds it from your paycheck just like federal tax.

Some cities also collect local income tax — including Columbus, Ohio; Philadelphia; and Washington, D.C. If you live or work in a city with local income tax, your employer withholds it too. You file a separate state or local return, usually by the same April 15 deadline as the federal return, though some states have different dates.

If you moved during the year or worked in multiple states, you may need to file returns in more than one state. Each state has different rules about who owes tax. Generally, you owe tax to the state where you live and the state where you earned income, though states have agreements to avoid double-taxing you.

Frequently Asked Questions

Why do I owe taxes if my employer already took money out of my paycheck?

Your employer's withholding is an estimate based on the W-4 you filled out. It doesn't account for all your actual income, deductions, or credits. When you file your return, the real calculation happens. If you had a second job, investment income, or major life changes, the withholding may not match what you actually owe.

Can I claim exempt on my W-4 to get more money in each paycheck?

Claiming exempt is only legal if you had no tax liability last year and expect none this year. If you claim exempt and actually owe tax, you'll have a large bill due April 15 with possible penalties. It's not worth the risk unless your situation genuinely qualifies.

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, which grow over time. If you're owed a refund and don't file, you simply don't get it — there's no penalty, but you lose money. You generally have three years to claim a refund before it's forfeited.

Do I have to pay income tax on all my income?

Most income is taxable, but some is not. For example, gifts, inheritances, and life insurance proceeds are generally not taxable. Some interest from municipal bonds is not taxable. Certain scholarships and educational assistance may not be taxable. Your tax return instructions explain what counts as taxable income.

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

A tax credit reduces your tax bill. A refundable credit can result in a refund if it's larger than your tax liability. A non-refundable credit can only reduce your tax to zero — it won't create a refund. A refund is money the government returns to you because you overpaid throughout the year.