Federal Income Tax: What Is it and Other Questions Answered

Federal Income Tax: What Is it and Other Questions Answered
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Before you received your very first paycheck as a new member of the workforce, you may have already decided how you were going to spend it. As you excitedly opened the envelope that held your check, your excitement may have quickly turned to disappointment. The check amount you saw probably came up short of your expectations.

Even though you filled out IRS Form W-4 (Employee’s Withholding Allowance Certificate) before you started your new job, the numbers on the form didn’t translate to the actual dollars and cents that your employer actually withheld from your paycheck. This first real-life experience of paycheck withholding set the stage for years to come as you began fulfilling your responsibility of paying federal income tax.

What Is Federal Income Tax?

The federal government assesses a tax on your annual earnings, just as it does for small businesses, large corporations and other legal entities. The U.S. uses this revenue collected from income taxes to pay for the country’s upkeep, including costs associated with its infrastructure, education, defense, public transportation and emergency disaster relief.

The federal income tax system is progressively assessed, which means that higher-income taxpayers owe proportionately higher taxes than lower-income taxpayers. The federal income tax filing date is April 15. In the case that April 15 falls on a weekend or holiday, the tax deadline is extended to the next business day.

Who Collects Federal Income Tax?

Under the authority of the U.S. Treasury Department, the Internal Revenue Service (IRS) collects federal income tax. From its early beginnings in 1862 when income tax was first used to pay war expenses, the IRS and the federal income tax system have gone through numerous changes. And even though the U.S. Supreme Court deemed income tax unconstitutional in 1895, Congress amended the Constitution in 1913 to reinstate this system of taxation.

How Does Income Tax Work?

Instead of facing a large tax bill at the end of each year that’s assessed on your total annual earnings, U.S. federal taxes are “pay as you go.” This means that you’ll make small payments toward your total tax bill as you earn income throughout the year. Depending on your source of income, you’ll make income tax payments that are withheld from your paychecks (or from other income distributions, such as Social Security or a pension plan) or you’ll make quarterly income tax payments (for example, if you’re self-employed). With this system, at the end of the tax year you’ll only owe the balance of your total annual tax liability minus the payments you’ve already made throughout the year.

What Is the W-4 Form?

If you’re someone else's employee (you're not self-employed), your employer gives you a W-4 form to complete when you begin your new job. You can also update your W-4 by submitting another form any time you need to update your tax information, for example, if your marital status changes or if you welcome a child into your family.

This form lets your employer know how much federal income tax to withhold from each of your paychecks, based on the number of allowances you claim. The IRS does not assess the amount of tax you owe based on these allowances, but its W-4 form simply serves as the guideline that lets your employer know how to calculate your withholding within the IRS pay-as-you-go tax system.

What Are W-4 Allowances?

Allowances reduce the amount of tax your employer withholds from your paychecks. But you won’t choose a dollar amount for the amount of your withheld taxes – an allowance is an actual number that you calculate. This calculation considers factors such as your income, marital status and the number of qualifying dependents you have. After you’ve computed the number of allowances you’ll claim, your employer converts this number into the actual dollar amount of federal income tax that’s withheld from each of your paychecks.

You don’t have to be a math whiz to compute your allowances, because the IRS includes three worksheets with the W-4 form that help you with your calculations. The IRS also provides an online tool called the "Withholding Calculator" to help you determine your number of allowances.

What Is the IRS Withholding Calculator?

If you prefer to click, tap or type your way through self-guided prompts online instead of using the paper worksheets that accompany the W-4, you can use the IRS Withholding Calculator. This tool offers a step-by-step analysis of your individual tax situation and suggests the total number of allowances for you to claim on your W-4, based on your answers to its questions.

The IRS recommends using the Withholding Calculator to perform a “paycheck checkup” as a proactive way to keep your allowances in line with any recent tax laws. Visit IRS.gov, type “tax withholding calculator” in the upper right search box and click or tap to access this feature. Follow the prompts to use this online tool.

What Is the W-9 Form?

If you’re self-employed, you won’t receive a W-4 form from an employer, but you may need to complete IRS Form W-9 (Request for Taxpayer Identification Number and Certification). You’ll complete this form, for example, if you receive income as an independent contractor, or if you receive payments from certain accounts such as a retirement account.

Clients and certain account payers will not withhold federal income tax as employees do, but they do report the income they pay you to the IRS. And it’s the W-9 form, which you complete, that sets this income-reporting ball in motion. It’s your responsibility to claim all the income you receive when you file your tax return.

What Is the W-2 Form?

IRS Form W-2 (Wage and Tax Statement) is an annual statement that employers furnish their employees, which includes income and taxes withheld, so that taxpayers can file their income tax return. Some employers give employees paper copies of their W-2s, and other employers provide this information online with an employee’s consent.

Although the tax year ends on the last day of the calendar year, employers have until Jan. 31 (or the next business day if Jan. 31 falls on a weekend or federal holiday) to furnish copies of W-2s to their employees. “Furnish” includes being mailed on this date, so employees may not actually receive their W-2s by Jan. 31.

What Are 1099 Forms?

You may not have a traditional employer-employee job, or you may even be retired. But if you’re self-employed, or if you receive certain types of nonwage income from a nonemployer source, you won’t receive a W-2 form at the end of the tax year. You’ll receive an IRS Form 1099 for each W-9 form you submitted throughout the year.

And there’s not a single 1099 form – it’s a series of forms, each of which begins with “1099” and ends with a coded set of initials to identify the specific form and its income application. For example, 1099-INT reports income you earned from interest and 1099-DIV reports income you earned from dividends. The federal income tax filing requirements include reporting all income you earn, even if the payee of the income does not provide you with a 1099 form.

What Are Federal Tax Deductions?

Tax deductions are certain allowable expenses that you deduct from your taxable income to lower your tax bill. The IRS gives taxpayers a choice of adding all these expenses – as itemized deductions – or simply taking what’s called the “standard deduction.” The choice that nets a lower tax bill is the option you’ll choose. A rule of thumb is that if your itemized deductions are less than the standard deduction you can take, it’s better to take the standard deduction for a greater tax benefit.

Standard deduction amounts may change from year to year, depending on new tax legislation. For the tax year 2018, the standard deduction amounts took a sharp upward turn over 2017’s amounts because of the Tax Cuts and Jobs Act (TCJA).

For the 2018 tax year, the standard deductions are:

  • $12,000 (filing single or married filing separately)
  • $18,000 (head of household)
  • $24,000 (married filing jointly)
  • $24,000 qualifying widow(er)

Additional deductions (2018 tax year):

  • Age – If you’re filing single or head of household, and you’re 65 or older, you can deduct an additional $1,600. If you’re married and filing a joint return, and either you or your spouse is 65 or older, you can deduct an additional $1,300. But if you and your spouse are both older than 65, and you’re filing a joint return, you can deduct an additional $2,600.
  • Blindness – If you’re filing single or head of household, and you’re legally blind, you can deduct an additional $1,600. If you’re married and filing a joint return, and either you or your spouse is legally blind, you can deduct an additional $1,300. But if you and your spouse are both legally blind, and you’re filing a joint return, you can deduct an additional $2,600.

Can I Claim Exemptions?

For tax years prior to (and including) 2017, taxpayers could claim exemptions for themselves, their spouses and their eligible dependents – in addition to their deductions. Each exemption reduced taxable income by $4,050, which also reduced a taxpayer's tax liability. But with the passage of the TCJA, and the increase in standard deductions, taxpayers can no longer claim exemptions, which have been suspended for the tax years 2018 through 2025.

2018 Federal Tax Filing Requirements

The IRS requires you to file an income tax return, depending on various factors such as your income, age, filing status, dependency status and other requirements. No matter which filing requirement category you fall into, you must report any self-employment income above $400.

  • Filing Single under age 65 – The minimum W-2 income required to file an income tax return is $12,000.
  • Filing Single over 65 – The minimum W-2 income required to file is $13,600.
  • Head of Household under 65 – The minimum W-2 income required to file is $18,000.
  • Head of Household over 65 –The minimum W-2 income required to file is $19,600.
  • Married Filing Jointly (both spouses under 65) – The minimum W-2 income required to file is $24,000.
  • Married Filing Jointly (one spouse over 65) – The minimum W-2 income required to file is $25,300.
  • Married Filing Jointly (both spouses over 65) – The minimum W-2 income required to file is $26,600.
  • Married Filing Separately (any age) – The minimum W-2 income required to file is $5.
  • Qualifying Widow(er) under 65 with dependent children – The minimum W-2 income required to file is $24,000.
  • Qualifying Widow(er) over 65 with dependent children – The minimum W-2 income required to file is $25,300.

Choosing Income Tax Filing Status

The IRS encourages taxpayers to choose the correct filing status that allows them to pay the least amount of tax. Whatever your marital status is on the last day of the year is your marital status for the entire year. For example, if you were married on Dec. 31, your filing status is married for the entire year. You may qualify for more than one filing status; in this case, choose to file under the status that requires you to pay the least amount of tax. IRS Publication 501 (Exemptions, Standard Deduction and Filing Information) not only helps you determine your correct filing status, but it also contains other helpful filing information. Visit IRS.gov/forms and search for this publication to view, download or print.