Updated: Dec 3, 2021
The United States operates on a “pay as you go” system of taxation. That means the government expects everyone to send in their share of what they owe in taxes as soon as earned income appears.
Most people experience this in one of two ways. Their employer will withhold an amount from their paycheck based on Form W-4, or self-employed persons must pay estimated taxes based on their previous filing.
Income taxes are only one type that you pay in the United States. Sales and local taxes get imposed on transactions, while property taxes are placed on owned real estate.
Some jurisdictions even place a tax on business properties.
Since the rules, rates, and regulations vary widely, it is essential to review the tax expectations each year for federal, state, and local responsibilities.
Why You Need to File and Pay Taxes
Governments collect taxes from people as a way to provide financial support for services. The money goes to police officers, park maintenance, public schools, roads, and much more.
Because the United States focuses on a capitalism-based economy, the government provides regulations and oversight over private businesses. It does not generally start a company so that it can make money. That means the primary source of revenue for public services comes from taxes.
This process works to stabilize the economy. When the government decides to pass a tax increase, then consumption levels decline so that activities slow down. If a decrease goes through, then that action promotes economic growth through increased spending.
Everyone who earns any form of income above $12,000 under the age of 65 must file a tax return for the year. Even if someone claims you as a dependent, your unearned income requires must be less than $1,050 to avoid the need to file a return.
Liabilities for Failing to File a Tax Return
If you fail to file a tax return and the government thinks you need to do so, then the IRS can and does penalize you with a late fee.
The one exception to that rule is if you are owed a refund from withholding activity. You have three years from the associated tax date in this one specific circumstance to file, or the IRS gets to keep the extra money you paid.
If you mix the tax deadline, the filing fee is 5% of the taxes you owe for each month past the deadline. This figure has a maximum responsibility of 25%.
When you miss the deadline by 60 days or more, then the IRS increases the minimum penalty to $210 or 100% of your unpaid tax – whatever amount ends up being less.
The government does recognize that there are extenuating circumstances at times, so the IRS does waive the late filing fee occasionally. You must meet specific requirements to qualify for this benefit, so most people find that the best way to avoid extra costs is to file on time.
It’s cheaper to file your taxes on time without paying what you owe than it is to skip the deadline altogether.
Types of Taxes You Need to Pay Each Year
Americans pay several different taxes throughout the year through their earned income. You’re responsible for Medicare, Social Security, and unemployment through payroll taxes that get deducted from each paycheck. This amount is the FICA line-item that you see on the itemized withholdings.
Corporations pay taxes on their profits. The income generated by business activities gets taxed at 21% as of 2018, with some people (including self-employed individuals) qualifying for pass-through deductions.
Excise taxes are levies placed on specific goods or activities. You see them on items like alcohol, sugary beverages, and gasoline most of the time.
Some households have taxes when they receive a significant gift of property valued at $15,000 or more – including cash. Estates that reach a specific financial threshold of more than $11 million are also subject to federal taxes.
Then there is the individual income tax that gets paid to the local, state, and federal governments. The United States has seven different brackets to review, with the tax rate ranging from 10% to 37% based on the amount that you earn.
Most individuals fit into the 10%, 12%, or 22% tax brackets based on what they earn. You pay 10% on the first $9,700 of your income, then 12% from $9,701 to $39,475. You then pay 22% on the amount after than until you reach $84,200.
Married couples who file jointly follow the same tax rules, but they also get to combine their income for each tax bracket. Different levels apply to people who file as the head of their household or if you are married but file separately.
Knowing your tax responsibilities can save you a lot of time and money. If you have any questions about your specific situation, then it helps to ask questions sooner rather than later. The government doesn’t accept any excuses for failing to file a return when one is necessary.