How the U.S. Taxes Its People: A Simple Guide

Marie Jeanne Kaba, MBA

Oct 13

4 min read

Updated: 23 hours ago

By Marie Jeanne Kaba, MBA | TETEEMA GROUP LLC

The U.S. tax system can feel confusing, especially if you grew up somewhere with a very different system. But the basic ideas are simple once someone explains them. This guide breaks down how people in the United States are taxed, in plain language.

A system of several layers

Americans generally pay taxes at three levels:

Federal taxes — collected by the Internal Revenue Service (IRS), the same everywhere in the country.
State taxes — most, but not all, states also tax income.
Local taxes — cities and counties may add their own income or sales taxes.

For most people, the biggest single tax is the federal income tax, so that is where we will start.

Federal income tax: the progressive system

The United States uses a progressive income tax, which means people with higher incomes pay a higher percentage of their income in tax. Your income is divided into portions called brackets, and each portion is taxed at its own rate. This is the point most people misunderstand: only the income within a given bracket is taxed at that bracket's rate, not your whole income — so moving into a higher bracket does not apply that higher rate to all of your income, only to the dollars that fall within it (How tax brackets work, Fidelity).

For example, suppose (hypothetically) that a 10% bracket covers the first $20,000 of taxable income and a 20% bracket covers income above that. If your taxable income is $50,000, your first $20,000 is taxed at 10% and only the remaining $30,000 falls into the 20% bracket.

Deductions: the standard deduction and itemizing

Before applying tax rates, you subtract deductions from your income. Nearly everyone takes the standard deduction, a fixed amount set by law. You can instead itemize — list your actual deductible expenses like mortgage interest, charitable gifts, and certain state taxes — if they add up to more than the standard deduction. You choose whichever benefits you more (USA.gov).

Credits: better than deductions

A credit reduces your tax bill dollar-for-dollar, which makes it more valuable than a deduction of the same size. Credits exist for children and other dependents, education, and, for those with low to moderate income, the refundable Earned Income Tax Credit, which can put money back in your pocket even if you owe no tax. The IRS posts current eligibility rules for these credits each year.

Payroll taxes: Social Security and Medicare

Separate from income tax, workers also pay payroll taxes that fund Social Security (retirement and disability benefits) and Medicare (health insurance for people 65 and older and some people with disabilities). Employees and their employers each pay a share, and the amounts are automatically withheld from every paycheck.

Self-employment tax

When you work for yourself — as a freelancer, contractor, rideshare driver, or small business owner — there is no employer to withhold and pay the payroll share. Instead, you pay self-employment tax, which covers both the employee and employer shares of Social Security and Medicare. The rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare — and it generally applies once your net self-employment earnings reach $400 or more; the tax applies to 92.35% of net earnings from self-employment (IRS Topic 554). The exact calculation, including the Social Security wage-base limit that can change each year, is worked out on Schedule SE.

Self-employed people generally must also pay estimated taxes quarterly — four payments a year instead of one big bill in April — because there is no employer withholding tax from each paycheck. The due dates are April 15, June 15, September 15, and January 15 of the following year; if a due date falls on a weekend or legal holiday, payment is on time if made the next business day (IRS estimated tax FAQs). Business profit or loss is reported on Schedule C, and Social Security and Medicare taxes on Schedule SE (IRS self-employed tax center).

State and local taxes

Most states also impose an income tax, though a few do not tax wages at all. States set their own rates, brackets, and deductions, so two people with identical incomes can owe different total tax depending on where they live. New York, for example, taxes income at the state level, and New York City adds its own local income tax for residents. On top of income taxes, states and cities also raise money through sales taxes on purchases and property taxes on real estate.

The tax return: putting it all together

Once a year, you file a tax return (usually Form 1040) that adds up your income, subtracts your deductions, applies the tax rates, and then subtracts any tax already paid through withholding or estimated payments. If you paid more than you owe, you get a refund. If you paid less, you pay the difference by the filing deadline. The IRS recommends e-filing with software as the easiest and most accurate method, with the fastest refunds (USA.gov).

The bottom line

The U.S. taxes income progressively in layers — federal, state, and sometimes local — and adds payroll taxes for Social Security and Medicare. Deductions lower your taxable income, credits lower your tax bill directly, and self-employed people pay and file differently. Once you understand those pieces, most of the rest of tax season is paperwork.

Sources

The official resources below provide further guidance, and we encourage you to consult them directly.

Have questions about your situation? Call us at 718-880-4485, message us on WhatsApp at 646-852-0774, or visit us at 451 Rockaway Avenue, Brooklyn. We serve clients in English, French and several West African languages.

This article is for general educational purposes only and does not constitute tax advice. For advice about your specific situation, please contact our office.

About the author

Marie Jeanne Kaba, MBA, is the founder and CEO of TETEEMA GROUP LLC in Brooklyn, New York. She is an IRS Certifying Acceptance Agent, has been NYS licensed for more than 20 years, and holds an MBA in Finance from St. John's University. She serves clients in English and French.

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