The 16th Amendment to the U. S. Constitution grants the federal government the authority to put its hands on the paychecks of the American people and in their pockets. In response, people who might have pledged their primary loyalty to their respective state and local governments become more aware that they are citizens of the United States. Due in large part to federal taxes, portions of a state government's revenue sources can dry up, which results in the states applying to the federal government for support. The more that states depend on the central government, the higher an individual's direct and indirect taxes.
If you’re willing to do your part by paying your federal income tax, but are not as familiar with how income tax works as you’d like to be, understanding the forms and terminology regarding income tax in respect to being a single employee can make things clearer for you.
The W-4 Form
For an individual employee, the U. S. federal tax process begins with the W-4 form. When you start a new job or adjust the amount of income tax that's withheld from your paycheck, the Internal Revenue Service (IRS) W-4 form is the IRS form you complete and give to your employer.
By accurately completing the form, you make sure that the right amount of money is deducted from your paycheck. This eliminates both the need for the IRS to send you a bill later and you being required to pay a penalty. Ideally, the amount withheld from your paycheck matches the tax you will owe.
The new W-4 form, which must be completed by any new employee in 2020, aims to account for all sources of income, whether it's earned from a primary or second job, self-employment or dividend and interest income. These W-4 entries determine in part the correct paycheck withholding amount. You also supply information about your dependents and tax deductions.
Forms 940 and 941
Your employer is required by law to withhold federal income tax from your paycheck and deposit it in a Federal Reserve Bank on a monthly or semi-weekly basis. Doing so ensures a steady cash stream for the federal government.
Most employers pay both a federal (FUTA) as well as a state unemployment tax. They are subject to FUTA tax on the wages they pay employees who aren’t household or agricultural employees and must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, quarterly.
Employers who withhold federal income tax or Social Security and Medicare taxes must file Form 941, Employer's Quarterly Federal Tax Return, each quarter.
The W-2 Form
To report wages to the IRS so that the agency has a record of them, an employer uses the W-2 Wage and Tax Statement.to report the annual wages. The W-2 Form informs the IRS of the amounts paid by the employer to an employee in the form of wages, tips or other compensation, and on behalf of the employee in the form of federal income tax, Social Security tax and Medicare tax.
The employer sends the W-2 Form and the W-3 Transmittal Form for all employees to the Internal Revenue Service at the end of each year. Also, a copy of each W-2 is sent to the respective employee. The employee uses the information in the W-2 to file an individual income tax return.
Read More: What Is Included in Federal Income Tax
Income Tax Return
When the 2020 tax season kicks in, an individual chooses his filing status, reviews his gross income and the cash withheld from his pay to determine whether he needs to file the federal tax return 1040 with the IRS. The tax return reports his income, deductions and tax credits. Also, the return allows the filer to calculate his tax liability, schedule tax payments or request refunds for the overpayment of taxes.
An individual can use variations of the basic Internal Revenue Service Form 1040, such as to itemize deductions, to file federal tax returns. One of the many 1099 Forms is used to report nonemployee compensation.
Internal Revenue Service
The IRS issues rules of procedure, instructs tax payers in the application of the rules and enacts penalties when taxpayers fail to adhere to the rules.
The IRS conducts an audit of tax forms and judicial functions. It confirms the validity of both the taxpayer's income tax return and other completed forms, and those completed and submitted by the filer's employer(s). Then, based on its interpretation of the Revenue Act of 1978 and a review of the IRS W-4, 944, 940, W-2 ,1040 and other forms, the IRS approves the filer's forms, or requests additional information and takes action to address discrepancies.
The income tax that the Treasury Department receives, which represents some portion of the income that you earn, allows the U. S. Government to operate. That tax not only represents income, but also unemployment compensation, interest and dividends as well as other forms of taxable income. It's one of the U.S. federal government's largest sources of revenue that allows the government to provide its many services.
- American Payroll: Sample Letter Explaining the 2020 Form W-4 to Employees
- IRS.gov: Tax Withholding Estimator
- IRS.gov: W-4 Form Employee's Withholding Certificate
- IRS.gov: Eight Facts on Late Filing and Late Payment Penalties
- IRS.gov: About Form 1040, U.S. Individual Income Tax Return
- IRS.gov: Depositing and Reporting Employment Taxes
- IRS.gov: 2020 Form W-2
- Constitutioncenter.org: Interactive Constitution 16th Amendment
- IRS.gov: 2020 Form 1099 Misc.
- IRS.gov: The Agency, Its Mission and Statutory Authority
- Senate.gov: Revenue Act of 1978
- IRS.gov: Who Must File Form 940?
- Internal Revenue Service. "About Form W-2, Wage and Tax Statement." Accessed Jan. 22, 2020.
- Internal Revenue Service. "Self-Employed Individuals Tax Center." Accessed Feb. 6, 2020.
- Internal Revenue Service. "General Instructions for Forms W-2 and W-3 (2019)." Accessed Jan. 22, 2020.
- Internal Revenue Service. "2020 Form W-2," Page 2. Accessed Jan. 24, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Jan. 22, 2020.
- Internal Revenue Service. "Prior Year Products." Accessed Feb. 6, 2020.
- Internal Revenue Service. "About Form W-4, Employee's Withholding Certificate." Accessed Feb. 6, 2020.
- Internal Revenue Service. "Forms and Associated Taxes for Independent Contractors." Accessed Jan. 22, 2020.
- U.S. Department of Education. "1098-E Tax Form." Accessed Jan. 22, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.