Federal Income Tax
Federal income tax is based on taxable income under federal tax rules.
Calculate paycheck taxes →Finance · Taxes
Taxes: A Simple Guide to U.S. Taxes
Understand how income taxes, payroll taxes, withholding, tax brackets, deductions, credits, and taxable income affect your money and your paycheck.
What Are Taxes?
Taxes are payments collected by governments to fund public programs and services. The U.S. tax system includes several different types of taxes, and the rules depend on the type of income, taxpayer, and jurisdiction.
For workers, the taxes you notice most often are federal income tax and payroll taxes withheld from your paycheck. Depending on where you live and work, state or local income taxes may also affect your pay.
Your paycheck is not necessarily the same as the amount you ultimately owe for the year. Withholding is generally a payment toward your tax liability. Your final tax liability is determined when your tax return is prepared.
The IRS explains that most income is taxable unless it is specifically excluded by law. Taxable income can include employment income, self-employment income, investment income, and other forms of income.
Main Types of Taxes
Different taxes apply to different types of income, purchases, property, and financial activity.
State Income Tax
State income-tax rules vary by state. Some states have no broad individual income tax.
Local Income Tax
Some cities, counties, or other local jurisdictions impose income taxes in addition to state taxes.
Social Security Tax
Social Security tax is one of the payroll taxes associated with employment.
Medicare Tax
Medicare tax is another payroll tax generally associated with employee wages and self-employment.
Self-Employment Tax
Self-employed workers may have additional tax responsibilities because taxes are not handled through ordinary employee withholding.
W-2 vs 1099 income →Federal vs. State Income Tax
Federal and state income taxes are separate systems. Your state of residence, work location, income, and applicable state rules can affect what you owe.
| Feature | Federal Income Tax | State Income Tax |
|---|---|---|
| Government | U.S. federal government | State government |
| Rules | Federal tax law | State-specific tax law |
| Applies nationwide? | Federal rules apply nationwide | Rules differ by state |
| Withholding | Often withheld from employee wages | May be withheld depending on the state |
How Taxable Income Works
Taxable income is not always the same as your total earnings. Applicable adjustments and deductions can affect the amount subject to tax.
1
Gross income
Total income before adjustments
2
Adjustments
Applicable adjustments to income
3
AGI
Adjusted gross income
4
Deductions
Applicable deductions
5
Taxable income
Amount used to calculate tax
Tax Brackets Explained
Federal individual income tax uses a progressive rate structure. Understanding marginal and effective tax rates helps explain why a higher tax bracket does not mean all of your income is taxed at that rate.
Marginal tax rate
Your marginal tax rate is the rate that applies to the next portion of taxable income within the applicable bracket.
Effective tax rate
Your effective tax rate represents the overall tax relative to the relevant income amount. It can be lower than your highest marginal rate because different portions of taxable income can be taxed at different rates.
Why this matters
Tax brackets should not be interpreted as one rate that applies to every dollar you earn.
Tax Withholding
Tax withholding is one of the main ways employees pay federal income tax during the year.
When you receive employee wages, your employer generally withholds federal income tax based on information such as your pay and the information provided on Form W-4.
The IRS explains that withholding can also apply to certain other payments. If your withholding is too high or too low compared with your eventual tax liability, your tax return may result in a refund or an amount due.
Why withholding affects your paycheck
Withholding reduces the amount of money you receive in each paycheck. It does not necessarily represent your final tax liability for the year.
Tax Deductions vs. Tax Credits
Deductions and credits both provide tax benefits, but they work differently.
Tax Deduction
A deduction generally reduces the amount of income that is subject to tax.
Tax Credit
A credit generally reduces the amount of tax owed after the relevant tax has been calculated.
Refundable Credit
Some credits can provide a refund when the credit exceeds the remaining tax liability, subject to the rules for that credit.
The IRS distinguishes the two concepts clearly: deductions reduce taxable income, while credits reduce tax. Eligibility and limitations depend on the specific deduction or credit.
Payroll Taxes
Payroll taxes are an important reason your take-home pay can be lower than your gross wages.
Social Security and Medicare taxes are commonly withheld from employee pay. Federal income tax withholding is calculated separately from these payroll taxes.
Your pay stub may therefore show several separate tax amounts rather than one single "tax" deduction.
Understanding these deductions can make it easier to compare gross pay with net or take-home pay.
Estimated Taxes
Not everyone pays taxes entirely through paycheck withholding.
The IRS describes federal income tax as a pay-as-you-go system. Employees often pay through withholding, while people with income that is not fully covered by withholding may need estimated tax payments.
Estimated taxes can be particularly relevant to self-employed people and people receiving certain types of income such as interest, dividends, capital gains, rents, or royalties.
The amount and timing of estimated payments depend on individual circumstances and applicable tax rules.
Tax Refund vs. Tax Liability
A tax refund and your tax liability are two different concepts.
Tax Liability
The amount of tax you are responsible for under the applicable tax rules after considering relevant income, deductions, credits, and other factors.
Tax Withheld
Amounts already paid toward your tax obligation during the year through withholding or other payments.
Tax Refund
A refund can result when the amount paid toward your tax obligation exceeds the amount ultimately owed, subject to the applicable return calculation.
Taxes for W-2 and 1099 Income
Employees and independent contractors can have different tax payment and reporting responsibilities.
Employees generally have taxes withheld from their wages. Independent contractors generally receive payments without ordinary employee withholding and may need to handle their own income-tax and self-employment-tax payments.
The distinction between employees and independent contractors depends on the actual working relationship and applicable rules, not simply on which tax form is received.
Read W-2 vs. 1099 IncomeSimple Tax Checklist
Use these questions to understand your tax situation before working through a tax return or paycheck estimate.
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Know your sources of income.
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Understand the taxes shown on your pay stub.
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Review your federal income-tax withholding.
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Understand taxable income and deductions.
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Check whether applicable tax credits may apply.
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Consider whether estimated tax payments apply.
PaycheckMint Tax & Pay Calculators
Use PaycheckMint calculators to estimate taxes and understand how deductions can affect take-home pay.
Paycheck Tax Calculator
Estimate federal, payroll, state, and other paycheck taxes.
Take-Home Pay Calculator
Estimate how much of your gross pay you may receive.
Salary Paycheck Calculator
Estimate paycheck amounts from an annual salary.
Hourly Paycheck Calculator
Estimate pay and deductions from hourly wages.
Overtime Pay Calculator
Estimate overtime earnings and overall gross pay.
What Is Taxable Income?
Learn how taxable income differs from total income.
Related PaycheckMint Guides
Continue learning about income, pay, and taxes.
What Is Net Income?
Understand income after applicable deductions and expenses.
What Is Take-Home Pay?
Learn how gross earnings become the amount you receive.
Salary vs. Hourly Pay
Compare the two common ways employees are paid.
W-2 vs. 1099 Income
Understand key differences between employee and contractor income.
Taxes FAQs
Common questions about income taxes and paychecks.
What is income tax?
Income tax is a tax imposed on taxable income. Federal income tax applies under federal
law, while some states and local governments also impose income taxes.
What are payroll taxes?
Payroll taxes are taxes associated with employment. Social Security and Medicare taxes
are commonly withheld from employee pay, while federal income-tax withholding is
calculated separately.
What is tax withholding?
Tax withholding is money withheld from certain payments, such as employee wages, and
sent to the government toward the person's tax liability.
What is taxable income?
Taxable income is the portion of income subject to tax after applicable adjustments and
deductions. Most income is taxable unless an exclusion or exemption applies.
What is the difference between a tax deduction and a tax credit?
A deduction generally reduces taxable income, while a tax credit generally reduces the
amount of tax owed. Some credits can be refundable.
Why is my take-home pay lower than my salary?
Take-home pay is lower than gross salary because taxes and other deductions can be taken
from earnings before the remaining amount is paid to you.
What are estimated taxes?
Estimated taxes are payments made during the year when income tax and certain other
taxes are not fully covered by withholding. They can be relevant to self-employed people
and people with other income.
Does every state have an individual income tax?
No. State individual income-tax systems differ, and some states do not impose a broad
individual income tax. Local income taxes can also apply in some locations.
See how taxes can affect your paycheck.
Use the PaycheckMint calculator to estimate your paycheck taxes and take-home pay.
Financial information:
PaycheckMint provides educational information and calculator estimates. Tax rules can vary by
individual circumstances, location, income type, filing status, and tax year. This page is not tax,
legal, or financial advice. For decisions about your individual tax situation, consult the IRS, your
state tax authority, or a qualified tax professional.