Understand the different types of taxes, like payroll taxes, to learn when they’re due and how much to pay.
Are you a new taxpayer and wondering what taxes mean for you? Looking for a refresher course on all tax basics? Either way, you’re in the right place.
Taxes can feel like an infinitely complex topic, especially if you’re new to filing your own returns or reporting payroll taxes for all your employees each year, but they don’t have to be. We’ll break it down for you here so you can move forward with confidence.
What Are Taxes?
Taxes are a financial obligation that members of a society have toward their government. Taxes can be applied to things like income, profit, and expenses.
Governments then use these financial contributions from civilians and businesses to build roads, create welfare programs, and provide other essential services.
When broken down simply, there are essentially two types of taxes: direct and indirect taxes.
Direct Tax
Direct taxes are those imposed directly on individuals. A person’s tax obligation is based on their income and ability to pay. This is where tax brackets come in to categorize people into the tax percentages they can afford.
Indirect Tax
Indirect taxes are those imposed on other parties, like corporations and the goods and services they provide. These taxes can indirectly impact individual consumers through the prices of goods and services, as well as sales tax.
Why Do We Pay Taxes?
The overall idea behind taxes is to enable a governing entity to have the funds necessary to care for its people, infrastructure, and economy.
The existence of taxes means that you, as a taxpayer, will have tax obligations to fulfil each year. You might already be paying taxes through the income tax on your paychecks or when a business charges sales tax on something you buy.
Governments typically establish a separate entity to collect and manage taxes. In the United States, this responsibility falls to the Internal Revenue Service (IRS). When taxpayers file tax returns each year, they submit them to the IRS. If you receive a tax refund or credit of some kind, it is paid and sent to you by the IRS.
Who Pays Taxes?
Almost everyone, including businesses, pays taxes. Typically, taxes are imposed on all residents of a country or state, including individuals and corporations. This means that companies, or corporate entities, are considered residents in the location where their headquarters are situated.
As a result, businesses must pay taxes at both the federal level and in the state where their headquarters are located.
What are Taxes Used for?
Tax money may be used for public services and other government operations and programs, such as Social Security and Medicare. It also contributes to public infrastructure, including public schools, emergency services, and roads.
Types of Taxes
There are several types of taxes you need to be aware of. You don't want to forget any type of tax and risk getting audited by the IRS for missing any of your tax obligations. For example, taxes are imposed at different levels of the government, like federal and state. Take note of the following examples of taxes that apply to you and your situation.
- Federal Tax: Federal taxes refer to all taxes imposed at the national level.
- State Tax: State taxes refer to all taxes imposed at the state level.
- Corporate Tax: Corporations also have to pay taxes. Businesses need to pay a percentage of the profits they earned that year. This money then goes toward funding federal government programs.
- Sales Tax: Sales tax is paid by taxpayers when they buy certain goods and services. What goods and services have a sales tax depends on the state you are in.
- Property Tax: Property taxes are paid by homeowners and other property owners. The percentage of property tax you'll need to pay depends on the value of the land the property is on and the value of the property itself.
- Tariff: Tariffs are taxes on imported goods that are paid by corporations in the business of importing goods from abroad.
- Estate Tax: An estate tax is imposed on an estate after the owner of the property has passed away.
- Income Tax: Income tax is a percentage of money taken from a taxpayer’s income. Before taxes, earnings are also referred to as gross income. There is income tax placed on all forms of gross income, so if you have more than one job, you will need to pay income tax on both sets of income.
- Payroll Tax: Payroll tax is a term used to describe the taxes deducted as a percentage from an employee's wages or salary. These taxes help fund programs such as Social Security and Medicare. As an employee, you may see these payroll taxes listed on your paycheck as items like FICA and MEDFICA, along with the deductions taken from your paycheck total.
Who Pays Payroll Tax?
Payroll tax payments are deducted from the employee’s total paycheck. Then, the employer facilitates the actual payment of that payroll tax to the IRS on behalf of their employees.
In other words, it’s as if you give your tax payment to your employer, who then gives the payment to the IRS.
Payroll Tax vs Income Tax
Payroll tax and income tax are very similar, but they do have some key differences. One of the main differences is who pays what.
Payroll tax is paid by the employee, while income tax is paid by the employer. These two types of taxes also serve different purposes. Payroll tax funds Social Security and Medicare, while income tax supports government spending and other public services.
Payroll Tax Deferral
The most recent payroll tax deferral was in August 2020, when certain payroll taxes (like Social Security) were deferred temporarily from some taxpayers due to the COVID-19 pandemic. This particular payroll tax deferral primarily affected service members and certain civilian employees and was in effect from September to December of 2020.
It's important to note that tax deferrals mean a tax obligation has been postponed, not eliminated. Taxpayers who used the payroll tax deferral paid back taxes later in 2021.
W4 Tax Withholdings
When starting a new job, employees will fill out a W-4 tax form to outline how much payroll tax they want taken out of (or withheld) from each paycheck.
By increasing your tax withholdings on a W-4, you can possibly expect a tax refund each year instead of a tax bill. However, by decreasing your withholdings, you may be able to keep more money in your paychecks and have more disposable income now.
Payroll Tax Forms
There are several payroll tax forms, many of which you might not have to deal with if you use a tax preparation service. These are the forms you'll need to take to a tax preparer so they can file your return on your behalf.
- Form 1040 is the tax form individuals use to report and file their income tax return for the year.
- Form 1099 is the tax form individuals use to report earnings from self-employment as a freelancer or independent contractor.
- Form W-2 is the traditional tax form that employed individuals receive at the beginning of each year, outlining all their earnings and wages from that employer.
- Form W-4 is what traditionally employed individuals fill out when they start a new job or adjust their W-4 form on file, which outlines their payroll tax withholdings.
When are Payroll Taxes Due?
Since payroll taxes are usually paid from each of your paychecks, this tax is usually paid regularly throughout the year. Employers are typically responsible for paying and reporting payroll taxes using forms like the 940 and 941, while employers are required to regularly report on items like:
- Wage payments
- Income tax withholdings
- Social Security tax
- Medicare taxes
- Taxes on tips
- Other forms of compensation
Payroll taxes, accompanying files, and reports are due to be completed and submitted to the IRS by the employer on a quarterly basis. These quarterly due dates are April 30, July 31, October 31, and January 31 of each year.
There are also annual forms that employers must complete and submit by January 31 of each year, including annual W-2 forms that need to be sent to all their employees.
The Bottom Line
Understanding how taxes apply to you is an important part of being a responsible citizen. Whether you’re an employer or an employee, payroll tax applies to you in some way.
Hopefully, this article has helped you understand how taxes apply to you, allowing you to better comprehend your personal tax situation.
