The US Tax System Explained
A plain-English guide to how federal income taxes work in America — no jargon, no fluff.
The Basics: Who Pays Tax?
If you earn income in the United States, you generally owe federal income tax. This applies to:
- US citizens living anywhere in the world
- Permanent residents (green card holders)
- Foreign nationals who work in the US
Tax is collected by the Internal Revenue Service (IRS), a federal government agency. On top of federal tax, most states charge their own income tax. Nine states — including Texas, Florida, and Washington — have no state income tax at all.
Progressive Tax Brackets
The US uses a progressive tax system. This means higher income is taxed at higher rates — but only the portion of income in each bracket is taxed at that bracket's rate.
A common misconception: people think that if they get a raise into a higher bracket, all their income suddenly gets taxed at the higher rate. That's not how it works. Only the dollars above the bracket threshold are taxed at the higher rate.
Example: Single filer, $80,000 income (2025)
Marginal Rate vs. Effective Rate
Two numbers you'll hear often:
Marginal Rate
The rate on your last dollar of income. "I'm in the 22% bracket" means your highest dollar was taxed at 22% — not all of your income.
Effective Rate
Your total tax bill divided by your total income. Always lower than your marginal rate. This is what you actually paid overall.
The Standard Deduction
Before calculating your tax, you reduce your income by the standard deduction — a flat amount the IRS lets everyone subtract. In 2025:
- Single: $15,000
- Married filing jointly: $30,000
- Head of household: $22,500
So a single person earning $60,000 only pays tax on $45,000 ($60,000 − $15,000). You can instead itemize deductions (mortgage interest, charitable donations, etc.) if they exceed the standard deduction, but most Americans take the standard deduction.
FICA: Social Security & Medicare
On top of income tax, employees pay FICA taxes (Federal Insurance Contributions Act):
- Social Security: 6.2% on wages up to $176,100 (2025)
- Medicare: 1.45% on all wages (+ 0.9% on wages over $200,000)
Your employer pays a matching 6.2% + 1.45% on your behalf. If you're self-employed, you pay both halves — 15.3% total (though half is deductible).
W-2 vs 1099 Income
W-2 Employee
- •Employer withholds tax each paycheck
- •Employer pays half of FICA
- •Receives W-2 form in January
- •Usually straightforward to file
1099 / Self-Employed
- •No automatic withholding — pay quarterly
- •Pay both halves of FICA (15.3%)
- •Receives 1099 form(s) in January
- •More deductions available (home office, etc.)
Filing Deadlines
- April 15 — Tax return due (or October 15 with extension)
- January 31 — Employers must send W-2s
- Quarterly — Self-employed estimated payments (April 15, June 16, September 15, January 15)
State Income Taxes
Most states have their own income tax on top of federal tax. Rates range from 0% (no state income tax in TX, FL, NV, WA, AK, SD, WY, TN, NH) to 13.3% (California's top rate — the highest in the US).
See the full 2025 tax brackets by state →
Calculate Your Taxes
Use our free tools to estimate your actual tax bill.