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Understanding the US Tax System: A Beginner’s Guide

The Three Layers of Taxation

The US tax system operates at three levels:

1. Federal Taxes – Administered by the IRS, these include income tax, payroll tax, and corporate tax.

2. State Taxes – Vary by state; may include income tax, sales tax, and property tax.

3. Local Taxes – Levied by cities/counties; often include property tax and local sales tax.

💰 Types of Taxes You’ll Encounter

Tax Type

Who Pays It

Income Tax

Individuals & Businesses

Payroll Tax

Employees & Employers

Sales Tax

Consumers

Property Tax

Property Owners

Excise Tax

Buyers of Specific Goods

🧾 Federal Income Tax: The Basics

• Progressive System: Higher income = higher tax rate.

• Tax Brackets: Ranges from 10% to 37% depending on income.

• Filing Status: Single, Married Filing Jointly, Head of Household - affects your deductions and rates.

• Standard vs. Itemized Deductions: Choose whichever gives you the bigger tax break.

• Tax Credits: Reduce your tax bill directly (e.g., Child Tax Credit, Education Credits).
  
  

🧾 State & Local Taxes: Not One-Size-Fits-All

• State Income Tax: Some states (like Texas and Florida) have none. Others (like California and New York) have progressive rates.

• Sales Tax: Varies widely - some states add local sales tax on top.

• Property Tax: Based on assessed value of real estate.

Tip: Always check your state’s Department of Revenue website for current rates and rules

🧾 Payroll Taxes

• Federal & State Income Tax Withholding: Withheld from employee wages based on W-4 elections and IRS tables.

• Social Security Tax: 

  • Rate: 6.2% from employee + 6.2% from employer

  • Wage base limit applies (e.g., $168,600 in 2025)

• Medicare Tax:

  • Rate: 1.45% from employee + 1.45% from employer

  • Additional 0.9% for high earners (income over $200,000)

• Federal Unemployment Tax (FUTA):

  • Employer only tax

  • Rate: 6.0% on first $7,000 of wages (credit reduction may apply)

• State Unemployment Tax (SUTA):

  • Employer only tax

  • Rate and wage base vary by state