There are several types of income taxes that help the government raise money to support its daily operations. These income taxes can affect income earned by individuals or corporations, and sometimes affects both. Taxes are collected each year in the U.S. by the Internal Revenue Service. Income taxes are a pay-as-you go system, meaning that as you earn money you have money withheld from your paychecks to pay for taxes at the end of the year.
Personal Income Tax
The best-known income tax is the tax that is paid on personal income. Personal income can include wages, interest income and dividends. In the U.S., the personal income tax is a progressive tax, meaning that the more money you make the higher percentage of your income you will pay in taxes. For example, in 2009 the first $8,350 of taxable income is taxed at a 10 percent rate, while income over $372,950 is taxed at a 35 percent tax rate.
Capital gains or losses are income or losses that you incur from investments in property or goods. The rate capital gains are taxed at depends on whether they are long-term or short-term capital gains. Long-term gains are those that you get from investments you have held for at least a year. Long-term gains are usually taxed at a maximum of 15 percent.
Video of the Day
Brought to you by Sapling
Corporate Income Taxes
Companies that make a profit in the U.S. are responsible for paying income taxes. According to the Tax Foundation, the combined federal and state corporate taxes in the U.S. are 39.1 percent in 2009, one of the highest rates in the world. Since individuals who receive dividends from these companies have to pay taxes on the dividends as well, some feel that dividends are unfairly subjected to double taxation.
Social Security and Medicare Taxes
Know together as FICA, or Federal Insurance Contributions Act, taxes, your pay is subject to Social Security and Medicare taxes. For individuals who are employed by an employer, these taxes are split between the employer and the employee. For 2009, the Medicare tax is 2.9 percent so the employer and the employee each pay 1.45 percent. The Social Security tax is 12.4 percent so the employer and employee each pay 6.2 percent. The Social Security tax is only charged on the first $106,800 of your income.
If you are self-employed, you are responsible for paying the total Social Security and Medicare taxes on your income instead of splitting these taxes with your employer, so you are responsible for paying the entire 15.3 percent. There are two taxes breaks associated with self-employment taxes. First, the 15.3 percent is only charged on 92.35 percent of your income. Second, half of what you pay in self-employment taxes is deductible from your taxable income when you pay your personal income tax.