What Are Taxes in the United States?

Basic Definition

Taxes are mandatory payments that the government collects from individuals and businesses to fund public services: roads, schools, national defense, health programs, Social Security benefits, and much more. Without taxes, governments cannot provide the services that modern society depends on.

In the United States, taxes are collected at three levels: federal (by the IRS), state (by each state's revenue department), and local (by cities and counties). Each level funds different public services.

Types of Taxes in the U.S.

1. Federal Income Tax

Administered by the IRS (Internal Revenue Service)
Progressive system: higher income means a higher marginal rate
7 tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%
Applies to wages, salaries, investment gains, self-employment income, rental income, and more
Filed annually using Form 1040

2. Payroll Taxes (FICA)

Social Security: 6.2% of wages (up to $176,100 in 2025)
Medicare: 1.45% of wages (no income cap)
Employers pay an equal matching amount
Self-employed workers pay both sides — 15.3% total — as self-employment tax
Funds Social Security retirement and disability benefits, and Medicare health coverage

3. State Income Taxes

Vary significantly by state — each state sets its own rules
9 states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
Other states have flat rates or progressive structures similar to the federal system
California has the highest top state income tax rate at 13.3%

4. Sales Tax

Not a federal tax — set by each state and municipality
Ranges from 0% (Oregon, Montana, New Hampshire) to over 10% in some localities
Collected at the point of sale on goods and services
5 states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon

5. Property Tax

Administered by local governments (counties and municipalities)
Based on the assessed value of real property (land and buildings)
Rates vary widely — typically between 0.5% and 2.5% of assessed value per year
Primary funding source for local public schools

6. Capital Gains Tax

Applies to profits from selling assets like stocks, real estate, and cryptocurrency
Short-term gains (held ≤1 year): taxed as ordinary income
Long-term gains (held >1 year): taxed at 0%, 15%, or 20% depending on income

7. Estate and Gift Tax

Estate tax applies to estates over $13.99 million (2025 exemption)
Gift tax applies to gifts over the annual exclusion of $18,000 per recipient (2024)
Few Americans are affected by federal estate or gift tax

Who Must Pay Taxes in the U.S.?

U.S. citizens — including those living abroad (the U.S. taxes worldwide income)
Permanent residents (Green Card holders) — taxed like U.S. citizens
Foreign nationals on work visas (H-1B, L-1, etc.) — generally if they meet the Substantial Presence Test
Nonresident aliens — only on U.S.-source income
Businesses — corporations, partnerships, and self-employed individuals

Even individuals without legal immigration status who earn income in the U.S. are required to file and pay taxes. They can obtain an ITIN (Individual Taxpayer Identification Number) using Form W-7.

When Are Taxes Paid?

Withholding (Employees)

If you are a W-2 employee, your employer automatically withholds federal income tax, Social Security tax, and Medicare tax from each paycheck and sends it directly to the IRS. At year-end, you file a return to reconcile what you paid with what you actually owe.

Estimated Tax Payments (Self-Employed)

Self-employed individuals, freelancers, and investors who don't have enough withholding must make quarterly estimated tax payments four times per year (April 15, June 16, September 15, and January 15) using Form 1040-ES.

Annual Tax Return

All taxpayers required to file must submit their annual tax return (Form 1040) by April 15 each year, reporting all income earned during the prior calendar year.

What Are Taxes Used For?

Federal tax revenue funds a wide range of government programs and services:

Social Security — retirement and disability benefits (largest federal expenditure)
Medicare and Medicaid — health coverage for seniors and low-income individuals
National defense — military and national security
Interest on national debt
Education — federal student loans, Pell Grants, and education programs
Transportation — highways, bridges, airports, and public transit
Veterans' benefits — healthcare, pensions, and support services
Scientific research — NIH, NASA, and other federal agencies