Takeaways
- Federal and state government have their specific income tax rates and brackets.
- Form W-2 reports your wages, bonuses, tips, and other earned taxable income.
- Personal income tax includes freelance, side hustle, and investment earnings.
- Business income tax applies to C corporations, LLCs, sole proprietors, and more.
- Income tax revenues fund government programs, municipal bond coupon payments, and development projects.
What Are Income Taxes?
Income taxes are levied by federal, state, and local governments on income earned by individuals and businesses in their jurisdiction. Municipalities use income tax revenues to fund public services, infrastructure development, and community projects.
Individuals and businesses must file tax returns annually to meet their tax obligations. Understanding how income taxes work, the different types, and filing deadlines is critical for successfully navigating the tax, legal, and framework.
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How Income Taxes Work
Income taxes are typically calculated as a percentage of a person's or business's taxable income. Taxable income is calculated by subtracting tax deductions and tax credits from gross income. The tax rate and brackets applied to taxable income can vary annually depending on variables like income level, filing status, IRS tax rate updates, and specific tax jurisdiction laws.
Income taxes can be levied at various levels of the government, including federal, state, and local. The specific rates and rules for income taxes vary widely across different jurisdictions. These taxes are a significant source of revenue for governments, used to fund public services such as education, healthcare, infrastructure, and social programs.
Income Tax Example
Imagine that you live and work in New York City. As a New York State and City resident, you pay at least three tiers of personal income tax. The first tier is your federal individual income tax, based on federal levied tax rates collected by the IRS.
From there, New York State has a progressive income state tax from 4% to 10.9%, depending on how much you earn.[1] Finally, as a New York City resident, you must pay a personal income tax from 3.078% to 3.876%, based on your taxable income.[2]
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4 Main Types of Income Tax
- Individual Tax: Individual income taxes are levied on individuals' earnings. It is calculated based on income level, filing status (single, married filing jointly, etc.), and tax deductions and credits. In the United States, the Internal Revenue Service (IRS), for instance, uses a progressive tax system, where higher income levels are taxed at higher rates. (Read more about the tax rates for 2024-2025).
- Business Tax: Business income tax is imposed on businesses' profits. The specific type of tax and the rate vary depending on the business structure (sole proprietorship, partnership, C corporation, etc.) and the jurisdiction. For example, corporations in the United States are subject to corporate income tax, while pass-through entities like S corporations and partnerships report business income on individual tax returns.
- State Tax: Many states also impose personal and business income taxes, typically calculated as a percentage of a person's or business's taxable income. State income tax rates and regulations vary widely; some states have no income tax (like Texas and Florida).
- Local Tax: Local cities and counties can also impose income taxes. These taxes are much lower than state and federal income taxes but can increase a taxpayer's and business's overall tax burden.
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When to File Income Taxes
The deadline for filing income taxes varies by jurisdiction. For personal income taxes and most small business taxes, the IRS deadline for 2024 is April 15, 2025.
State and local tax deadlines can vary, so it is critical to consult a tax professional. Each tax authority and municipality will have specific guidelines to determine the filing deadline.
Factors Affecting Filing Deadlines
- Extensions: Taxpayers may request an extension to file their tax return. An extension grants additional time to file the return but does not extend the deadline for paying taxes owed. You can request a federal tax filing extension, extending your filing date from April 15 to October 15 without penalties.[3]
- Fiscal Year Filers: Businesses operating in a fiscal year (a 12-month period that doesn't necessarily align with the calendar year) have different filing deadlines based on their fiscal year-end.
- Military Personnel: Armed Forces members serving in combat zones or contingency operations may have extended deadlines for filing their taxes.
Late Filing Penalties
Filing your taxes late can result in penalties and interest charges. To avoid these penalties, it's important to file your tax return on time or request an extension.
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Consider using tax software or consulting with a tax professional to stay organized and avoid missing deadlines. They can help you track important dates, calculate your tax liability, and ensure timely filing.
Federal vs. State Income Taxes
The federal government imposes federal income taxes, while individual states impose state income taxes. Both federal and state income taxes have rules, rates, and deadlines. Here's how they work:
Federal Income Taxes
The federal government levies federal income taxes on all individuals and businesses operating within the United States. The IRS is the federal agency responsible for collecting these taxes. These taxes fund various federal programs, such as Social Security, Medicare, and national defense.
State Income Taxes
Individual states can also levy state income taxes. State-specific rules, rates, and deadlines vary from state to state. Some states have no income tax, while others have progressive income tax systems. State income taxes fund state-level programs such as education, transportation, and public safety.
Smart Summary
Income taxes are taxes levied on personal and business income by governments. Federal, state, and city governments have their idiosyncratic tax rates, which can vary your tax burden depending on where you live and operate your business. Tax laws and regulations are constantly evolving and remain complex. Online tax software programs have streamlined the data gathering and reporting process for millions of filers. If you need advice beyond what they can provide, you can always talk to a financial advisor or tax professional to ensure you maximize your tax benefits.
You Might Also Like:
(1) New York State Department of Taxation and Finance. New York State tax rate schedule. Last Accessed January 12, 2025.
(2) New York City Comptroller. Raising Revenues. Last Accessed January 12, 2025.
(3) Internal Revenue Service. Get an extension to file your tax return. Last Accessed January 12, 2025.
