What Are Taxes and Why Do We Pay Them?
Taxes are mandatory payments to the government that fund public services: roads, public schools, fire departments, and social safety nets like Social Security and Medicare.
Federal Income Tax
Goes to the US government. Progressive — higher earners pay higher rates. Funds defense, federal programs, national debt.
State Income Tax
Goes to your state government. 9 states have no income tax: Texas, Florida, Washington, Nevada, Wyoming, South Dakota, Alaska, Tennessee, New Hampshire.
Social Security Tax
6.2% of your wages (your employer also pays 6.2% on your behalf). Funds retirement benefits you can collect after age 62.
Medicare Tax
1.45% of your wages (employer also pays 1.45%). Funds healthcare for Americans 65 and older.
Sales Tax
Added at checkout — not taken from your paycheck. Varies widely by state: 0% in Oregon, 9.45% in Tennessee. You pay this even without filing a tax return.
Understanding Your W-2
Your employer sends you a W-2 form every January showing how much you earned and how much was withheld from your paychecks throughout the year. You use this to file your taxes.
| Box | What It Means |
|---|---|
| Box 1 | Total wages earned (after pre-tax deductions like 401k) |
| Box 2 | Federal income tax withheld — this is what you prepaid to the IRS |
| Box 4 | Social Security withheld (6.2% of your wages) |
| Box 6 | Medicare withheld (1.45% of your wages) |
| Box 16 | State wages — income taxable by your state |
| Box 17 | State income tax withheld |
When you file: if Box 2 shows more withheld than you actually owe → you get a refund. If less → you owe more. This is why filing matters even if you expect a refund.
W-2 vs. 1099 — Gig Work
W-2 is for employees whose employer withholds taxes. If you work a side hustle through Uber, DoorDash, Fiverr, or any freelance work — you get a 1099-NEC instead. The big difference: you pay BOTH the employee and employer halves of Social Security/Medicare — that's 15.3% self-employment tax on top of income tax. Budget for this if you do gig work.
Tax Brackets — You're Not Taxed 22% on Everything
The US uses a marginal tax system. Being in the 22% bracket does NOT mean you pay 22% on all your income — only on the portion within that bracket.
| Rate | Income Range (Single, 2024) |
|---|---|
| 10% | First $11,600 |
| 12% | $11,601 – $47,150 |
| 22% | $47,151 – $100,525 |
| 24% | $100,526 – $191,950 |
Real Example: $50,000 Income
On $50,000 you pay: 10% on the first $11,600 ($1,160) + 12% on $11,601–$47,150 ($4,266) + 22% on $47,151–$50,000 ($627). Total tax: $6,053 — effective rate of ~12.1%, not 22%. The standard deduction ($14,600 in 2024) reduces your taxable income first, making your actual bill even lower.
Standard Deduction
In 2024, the standard deduction for a single filer is $14,600. This is subtracted from your gross income before any tax is calculated. If you earn $14,600 or less, your taxable income is $0 — you owe no federal income tax. You should still file to get back any withheld amounts.
Filing Taxes & ITIN
How to File
Most people can file for free. Good tools:
- IRS Free File — if your income is under $79,000. Free, directly through the IRS website.
- TurboTax Free Edition — good for simple W-2 situations
- H&R Block Free Online — similar to TurboTax, often handles state returns too
- VITA (Volunteer Income Tax Assistance) — free in-person help from IRS-certified volunteers, especially for low-income filers and non-English speakers
Deadline: April 15 every year. If you need more time to file (not to pay), you can request a 6-month extension for free — but any taxes owed are still due April 15.
ITIN — For People Without an SSN
An ITIN (Individual Taxpayer Identification Number) is a 9-digit number the IRS issues to people who must pay US taxes but are not eligible for a Social Security Number — including non-resident aliens and undocumented immigrants. It looks like XXX-XX-XXXX and starts with 9.
What an ITIN Can and Cannot Do
- Can: file federal and state tax returns
- Can: open certain bank accounts and apply for some loans
- Can: claim tax credits like the Child Tax Credit
- Cannot: authorize work in the US
- Cannot: provide eligibility for Social Security benefits
- Cannot: be used instead of an SSN for employment
DACA Recipients
DACA recipients receive an Employment Authorization Document (EAD) and are eligible for a Social Security Number. If you are a DACA recipient, use your SSN — not an ITIN — when filing taxes and for employment. Using an ITIN when you qualify for an SSN can create complications.