What Is Income Tax? A Simple Guide
A simple guide to income tax in the US: what it is, who collects it, the difference between federal, state, and payroll taxes, and how it comes out of your pay.
Income tax is the biggest tax most working people pay, and also the one with the most confusing vocabulary. This guide explains the basics in plain words: what income tax is, who collects it, and why your paycheck is smaller than your salary.
The short answer
Income tax is money the government collects from what you earn. That includes wages and salaries, tips, self-employment income, and most investment income. The more you earn, the more you pay, both in dollars and (up to a point) as a share of your income. That's because the US uses a progressive tax built on brackets, which our guide on how tax brackets work explains step by step.
Three governments can tax the same paycheck
In the US, income tax can come from up to three places:
- Federal income tax. Charged by the national government, the same in every state. This is usually the largest piece. See what federal income tax is and the current rates.
- State income tax. Most states charge their own, each with its own rates and rules. Some use brackets, some charge one flat rate, and nine states charge none at all.
- Local income tax. A small number of cities add their own on top. The best-known example is New York City.
Any state page on this site shows the federal and state pieces together for an income you pick.
Income tax is not the only thing taken from your pay
Two other deductions come out of most paychecks and are often confused with income tax:
- FICA: Social Security and Medicare taxes. These have their own flat rates and apply everywhere, even in states with no income tax.
- Withholding: this one is income tax, just collected early. Your employer takes an estimated amount from each paycheck and sends it in for you. When you file your return, you settle up: a refund if too much was withheld, a payment if too little.
Together, these are the difference between your salary and your take-home pay.
The tax applies to taxable income, not your whole salary
Income tax is calculated on your taxable income: your income after subtracting deductions. For most people, the big one is the standard deduction, a set amount everyone can subtract based on their filing status. That's why the tax is figured on a smaller number than what you earn.
From there, the brackets split your taxable income into parts and tax each part at its own rate. Our calculator does this math for any income and shows exactly where each dollar goes.
Sources
Frequently asked questions
What is income tax?
Income tax is money the government collects from what you earn, including wages, self-employment income, and most investment income. In the US it is the main way the federal government pays for things like defense, Social Security, Medicare, and public services.
What is the difference between federal and state income tax?
Federal income tax is charged by the national government and works the same in every state. State income tax is a separate, usually smaller tax charged by most (but not all) states, each with its own rates and rules. Some cities add a third one, like New York City.
Is FICA the same as income tax?
No. FICA (Social Security and Medicare taxes) is a separate deduction from your pay with its own flat rates. You pay it in addition to income tax, even in states with no income tax.
Who has to file an income tax return?
Most people whose income is above certain amounts must file a federal return each year. The exact filing rules depend on income, age, and filing status, and the IRS publishes them each year.
Why is my paycheck smaller than my salary?
Employers take estimated income tax out of each paycheck (called withholding) and send it to the government during the year, along with Social Security and Medicare taxes. At tax time you settle the difference: a refund if too much was taken, a payment if too little.