Federal income tax (FIT) is a tax on the annual earnings of businesses, individuals, trusts, and legal entities, forming the largest source of revenue for the United States government.
What is federal income tax?
The Internal Revenue Service (IRS) levies a federal income tax, which applies to all earnings contributing to a taxpayer’s taxable income. The average tax is determined by wages, salaries, commissions, bonuses, interest earned on a savings account, etc.
The federal government uses federal income tax to run the country, putting the funds toward building and repairing infrastructure, improving education and public transportation, and providing disaster relief.
The revenue generated by federal income tax also contributes toward social security programs, funding major health insurance programs such as Medicare, and funding the pension and benefits of government workers.
Who pays federal income tax?
All residents and citizens of the United States are subject to pay federal income tax. However, not everyone needs to file a tax return. The tax filing status is determined by total income and employment status.
In most instances, employers withhold federal income tax from employees' wages. Employers use the employee’s Form W-4 and relevant documentation to determine how much tax to withhold.
As a self-employed individual, you are required to file an annual return and pay an estimated tax each quarter.
What income tax do you pay if you work remotely?
Remote work can operate on a national or international level.
International taxes for remote workers can be complicated, determined by the type of remote worker and their income tax responsibilities.
For example, foreign independent contractors must file taxes based on whether tax partnerships exist and where the contractor is liable to pay local taxes.
On a federal level, U.S workers pay taxes where they physically work and not where their employers operate. U.S citizens living abroad should also consider foreign tax credits, foreign earned income exclusion, foreign housing exclusion and deductions, and U.S tax treaties.
These tax laws will impact the amount of tax due and where it is due.
How to calculate your income tax
Federal income tax rates are calculated using a progressive tax system, meaning that the tax rate increases as taxable income increases, according to a marginal tax rate (calculated using the last dollar of taxable income to measure thresholds).
Federal income tax brackets
A tax calculator and tax software are useful to determine take-home pay, but it’s also a good idea to understand the federal tax rates.
When assessing the bracket that determines tax payments, consider how many individual tax brackets overlap based on gross income.
The federal income tax brackets for the 2022 tax year are as follows:
- Single earning: $0 - $10,275
- Head of household earning: $0 - $14,650
- Married filing jointly or qualifying widow: $0 - $20,550
- Married filing separately: $0 - $10,275
- Single earning: $10,276 - $41,775
- Head of household earning: $14,651 - $55,900
- Married filing jointly or qualifying widow: $20,551 - $83,550
- Married filing separately: $10,276 - $41,775
- Single earning: $41,776 - $89,075
- Head of household earning: $55,901 - $89,050
- Married filing jointly or qualifying widow: $83,551 - $178,150
- Married filing separately: $41,776 - $89,075
- Single earning: $89,076 - $170,050
- Head of household earning: $89,051 - $170,050
- Married filing jointly or qualifying widow: $178,151 - $340,100
- Married filing separately: $89,076 - $170,050
- Single earning: $170,051 - $215,950
- Head of household earning: $170,051 - $215,950
- Married filing jointly or qualifying widow: $340,101 - $431,900
- Married filing separately: $170,051 - $215,950
- Single earning: $215,951 - $539,900
- Head of household earning: $215,951 - $539,900
- Married filing jointly or qualifying widow: $431,901 - $647,850
- Married filing separately: $215,951 - $323,925
- Single earning: $539,901 or more
- Head of household earning: $539,901 or more
- Married filing jointly or qualifying widow: $647,851 or more
- Married filing separately: $323,926 or more
Note that the filing season for these taxes has a deadline of April 2023 or October 2023 with an extension, so tax preparation needs to be timely.
Single filers, families, and corporations can lower the amount of tax owed by leveraging tax credits and tax deductions.
The government lowers the tax bill using tax credits to incentivize job creation, job retention, new capital investment, and more. For example, a child tax credit is available for the cost of child care.
Tax deductions reduce the actual tax bill by reducing the amount owed on your federal tax return. When your deductions exceed the standard deduction for your filing status, then itemized expenses become itemized deductions and lower the taxable income.
Federal vs. state tax
State tax is paid in addition to federal income tax, and state income tax rates differ from one state to another. The difference between these tax collections lies in where the funds are allocated — to the federal government or the state government.
All states withhold state income tax except the following:
- South Dakota
The total tax that appears on an individual pay stub includes federal income tax, payroll taxes, and state income taxes.
At Deel, we help businesses and remote workers navigate the modern working world, offering knowledge on the effective tax rate in various situations. Find out more about our robust platform today!