How do taxes work?

A US worker pays a few different taxes: federal income tax, state income tax in most states, Social Security and Medicare, and sales tax when they shop. Most of it is taken from your pay during the year, and a tax return each spring checks that you paid the right amount.

Four taxes most workers pay

Federal income tax, state income tax (most states have one), payroll tax for Social Security and Medicare, and sales tax on many purchases.

Payroll tax is a flat 7.65%

As an employee, 6.2% of your pay goes to Social Security and 1.45% to Medicare. Your employer pays a matching 7.65% on top. Social Security tax stops at a yearly earnings cap.

Withholding now, a return later

Your employer holds back income tax from each check based on your W-4 form. Your tax return, usually due April 15, adds up the year and settles the difference.

Income tax is figured on taxable income

Taxable income is what is left after you subtract certain things from your total pay, such as pre-tax retirement savings and the standard deduction, which is $16,100 for a single filer in 2026.

The taxes on your pay and your shopping

Federal income tax goes to the US government. The more you earn in a year, the more you owe, and the rate rises in steps as income climbs. The tax brackets lesson shows how those steps work.

State income tax goes to the state where you live or work. Most states have one, a few have none, and each sets its own rates. Some cities and counties add a local income tax on top.

Payroll tax, also called FICA, pays for Social Security and Medicare. These programs send money and health coverage to retirees and some people with disabilities. Unlike income tax, it is a flat share of every dollar of pay, with no deduction first.

Sales tax is added at the register when you buy many goods and some services. States and cities set the rate, and a few states charge none.

Withholding during the year

The US tax system is pay as you go. Your employer takes income tax, Social Security and Medicare out of each paycheck and sends it to the government for you. That is called withholding.

How much income tax gets withheld depends on the W-4 form you fill out when you start a job. It is an estimate. Payroll tax needs no estimate, because it is always 7.65% of your pay.

Filing a tax return each year

A tax return is the form where you add up your income for the year and work out your true income tax. It is usually due April 15 for the year before. Your W-2 and any 1099 forms tell you what to enter.

Then you compare the true tax with what was already withheld. If more was withheld than you owe, the government sends you a refund. If less was withheld, you pay the difference. A refund is your own money coming back, not a bonus.

W-2 workers and 1099 workers

If you are an employee, your employer sends you a W-2 form each January showing your pay and the tax withheld. Your employer also pays half of your Social Security and Medicare.

If you are self-employed, such as a freelancer or a delivery app driver, clients may send you a 1099 form instead. Nobody withholds anything. You pay both halves of Social Security and Medicare, called self-employment tax, and send in income tax yourself, usually in four estimated payments a year. Missing them can bring a penalty.

What taxable income means

Income tax is not charged on every dollar you earn. Start with your total income, subtract pre-tax deductions such as a traditional 401(k), then subtract the standard deduction. What is left is taxable income, the number the tax rates apply to.

So two people with the same salary can owe different amounts. Retirement savings, filing status and credits all change the bill. Self-employed workers also subtract business costs first.