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 federal government, and in most states, to your state government as well. The IRS (Internal Revenue Service) collects federal income tax. Your employer usually withholds it from each paycheck automatically, or if you're self-employed, you pay it yourself in quarterly installments. The amount withheld depends on how much you earn and the information you provide on Form W-4 (for employees) or your estimated tax payments (for self-employed people).

The tax rate you pay is not the same for everyone. The federal government uses a progressive tax system, which means people who earn more money pay a higher percentage in taxes. For 2024, federal rates range from 10% on the lowest earnings to 37% on the highest. Your state may have its own income tax with its own rates, or it may have no income tax at all — that depends on where you live.

At the end of the year, you file a tax return (usually Form 1040) to report all the income you earned and calculate how much tax you actually owed. If your employer withheld too much, you get a refund. If too little was withheld, you owe the difference.

Key Takeaways

  • Income tax is a percentage of your earnings that goes to the federal government and, in most states, to your state government.
  • Your employer withholds federal income tax from your paycheck based on the W-4 form you complete, or you pay it yourself if you're self-employed.
  • The federal tax rate increases as your income increases — this is called a progressive tax system.
  • You file a tax return at the end of the year to report your total income and receive a refund or pay any amount still owed.
  • Not all states charge income tax, and state rates vary widely depending on where you live and work.

How federal income tax withholding works

When you start a job, your employer asks you to complete Form W-4. This form tells your employer how much federal income tax to take out of each paycheck. The form asks about your filing status (single, married, head of household), the number of dependents you claim, and whether you have other income or jobs. Your employer uses this information to calculate the withholding amount.

The IRS publishes withholding tables each year that show employers how much to deduct based on your pay frequency, filing status, and the information on your W-4. If you claim zero dependents and have no other income, your employer will withhold more tax — which means a larger refund later but less money in each paycheck. If you claim more dependents or have other income, less is withheld from each check.

You can change your W-4 at any time during the year if your situation changes — for example, if you get married, have a child, or take a second job. Updating your W-4 helps may support the right amount is withheld so you don't owe a large bill or receive a huge refund at tax time.

Tax brackets and how they affect what you owe

The federal government divides income into tax brackets, and each bracket has its own tax rate. For 2024, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A common mistake is thinking that if you earn enough to reach the 24% bracket, all your income is taxed at 24%. That is not how it works.

Instead, only the income that falls within each bracket is taxed at that rate. For example, if you are single and earn $50,000 in 2024, the first $11,600 is taxed at 10%, the next portion up to $47,150 is taxed at 12%, and only the amount above $47,150 is taxed at 22%. This is why it is called a progressive system — you pay a higher rate only on the income that actually falls in the higher bracket.

Your effective tax rate is the average percentage of your total income that goes to federal tax. It is always lower than your highest bracket rate because only part of your income is taxed at the top rate. Understanding this helps you see why earning more money, even if it pushes you into a higher bracket, still leaves you with more take-home pay.

State income tax varies by location

Nine states have no state income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). The remaining 41 states and the District of Columbia charge state income tax, but the rates and rules differ significantly.

Some states, like Colorado and Illinois, have a flat tax rate — everyone pays the same percentage regardless of income. Other states, like California and New York, use a progressive system similar to federal tax, with rates that increase as income rises. A few states tax only certain types of income, such as capital gains or business profits.

If you work in one state but live in another, you may owe income tax to both, though most states offer a credit to prevent double taxation. If you are retired or move during the year, your state tax situation can change. When you file your federal return, you also file a state return (or multiple state returns if you worked in more than one state) to report your state income and calculate what you owe.

Self-employment tax and quarterly payments

If you are self-employed — meaning you work for yourself rather than for an employer — you do not have an employer to withhold federal income tax from your earnings. Instead, you are responsible for paying estimated tax four times a year, in quarterly installments. These payments are due on April 15, June 15, September 15, and January 15 of the following year.

To calculate your quarterly payment, you estimate your total income for the year, subtract deductions you expect to claim, and calculate the tax owed on that amount. You then divide that by four and pay one-quarter each quarter. If your income changes during the year, you can adjust your next quarterly payment. If you underpay, you may owe penalties and interest when you file your annual return.

Self-employed people also pay self-employment tax, which covers Social Security and Medicare. This is in addition to federal income tax. Self-employment tax is 15.3% on 92.35% of your net business income (12.4% for Social Security and 2.9% for Medicare). You can deduct half of this amount when calculating your federal income tax, which provides some relief.

Deductions and credits that reduce your tax bill

Not all of your income is subject to tax. The IRS allows you to subtract certain amounts — called deductions — before calculating how much tax you owe. You can choose between the standard deduction (a fixed amount that depends on your filing status and age) or itemized deductions (the actual total of may have access to expenses like mortgage interest, property taxes, and charitable donations).

For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. Most people use the standard deduction because it is simpler and often larger than their itemized deductions. If you itemize, you must keep receipts and documentation for all deductible expenses.

Tax credits are different from deductions — they directly reduce the amount of tax you owe, dollar for dollar. 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 education expenses. Credits are more valuable than deductions because they reduce your actual tax bill rather than just your taxable income.

What happens when you file your annual return

Each year by April 15, you file a tax return reporting all income you earned during the previous year. For most people, this is Form 1040 plus any schedules that explore to your situation. You report wages from your W-2 forms (provided by your employer), self-employment income on Schedule C, investment income on Schedule B, and any other income sources.

You then calculate your total tax using the tax tables or tax software, subtract any credits you are may have access to to, and compare that to the total amount already withheld from your paychecks or paid in quarterly installments. If you withheld more than you owed, the IRS sends you a refund. If you withheld less, you send the IRS a payment with your return.

Filing on time is important. If you owe tax and do not file by April 15, you face penalties and interest charges that grow each month. If you are owed a refund, there is no penalty for filing late, but you cannot receive your refund until you file.

Frequently Asked Questions

Why does my paycheck show federal income tax, Social Security, and Medicare as separate items?

Federal income tax, Social Security tax, and Medicare tax are three different taxes. Federal income tax funds general government operations. Social Security and Medicare are separate payroll taxes that fund those specific programs. Your employer withholds all three from your paycheck and sends them to different government accounts.

If I get a large refund every year, should I change my W-4?

A large refund means your employer withheld more tax than you actually owed, so you gave the government an interest-free loan all year. You can adjust your W-4 to claim more dependents or allowances, which will reduce the withholding and put more money in your paycheck each week. The goal is to owe close to zero or receive a small refund.

Do I have to pay federal income tax if I earn very little?

No. If your income is below the standard deduction for your filing status, you generally do not owe federal income tax. However, you may still want to file a return if you had taxes withheld, because you would receive a refund. Some people also file to claim refundable credits like the Earned Income Tax Credit, which can result in a refund even if they owe no tax.

What is the difference between gross income and taxable income?

Gross income is all the money you earn before any deductions. Taxable income is what remains after you subtract the standard deduction (or itemized deductions) and certain other adjustments. You pay federal income tax on your taxable income, not your gross income, which is why deductions matter.

Can I deduct my work clothes or commute expenses?

Work clothes are deductible only if they are specialized uniforms or protective gear required for your job and unsuitable for everyday wear. Regular business clothes are not deductible. Commute expenses to and from your regular workplace are not deductible. However, if you are self-employed and work from a home office, you can deduct a portion of your rent or mortgage, utilities, and other home expenses.