Summary
As a business owner, employer, or even employee, it’s important to understand taxes. In the United States, the tax system ultimately benefits business owners and businesses. Unfortunately, most people don’t know that, but this beginner’s guide to the U.S. tax system will eventually provide you with everything you need to know to get started when you pay taxes in 2023.
Even if the American tax system might be complicated, this article will serve as your beginner’s guide to the U.S. tax system. After you read this, you’ll know all about tax basics and be prepared to file your paperwork to send it off to the IRS or even e-file.
We will go over the tax rules, taxable income, and some of the various tax credits that exist. Furthermore, we will also go over the categories for filing taxes, such as married filing jointly, filing separately, and individual. First, let’s talk about the history of income taxes in the U.S.
Income Taxation in the United States
Income taxes in the United States were not always a reality. For example, before the Civil War, the United States did not have any form of income tax. Instead, the legislative branch of the government created the IRS and income taxes to help prepare for war, rebuild infrastructure, and assist states through their state tax returns.
Today, America operates with a progressive tax system. This means that taxes are calculated based on tax brackets with percentage increases with each income threshold. There are specific tax brackets with different tax rates. The more you make, the more you will pay in–unless you know about deductions and tax credits.
Tax law in the United States has created rules for foreign assets, sales taxes, local taxes, self-employment taxes, and earned income. There are even laws for state taxes, as some states impose taxes to help drive funding for their infrastructure. The government and the IRS are in charge of taxes and review all tax returns filed.
If you do your taxes correctly, you can enjoy a tax refund and an excellent tax return every year. But first, let’s talk about taxable income and why it matters when calculating your refund.
What is Taxable Income?
Taxable income is the amount of income that is subject to being taxed. This can calculate relatively easily! You have to include any of the following: wages or salaries, commissions, tips, bonuses, capital gains, income from freelancing or self-employment, rental income, royalties, interest, dividends, gambling wins, and even unemployment compensation.
What is Not Taxable?
Some items are not subject to income taxes. These include child support payments, life insurance proceeds, interest from municipal bonds, disability benefits, gifts, and inheritances. So, in most cases, your total income is not subject to taxation, which significantly benefits citizens!
Any deductions are also considered not taxable and are calculated while filing taxes. If you file online, you’ll see this slowly deducted from your applicable tax refund. The government has several of these outlined that account for various scenarios to help the average person save money.
How to Calculate Your Taxable Income
To calculate your taxable income, compute your gross income. This would be all of the income that consider taxable. After this, you itemize your deductions or take a standard deduction. For business owners, you should take advantage of your itemized deductions!
For 2022, the standard deduction was $12,950 for single taxpayers, and married couples filing separately and double the amount for married filing jointly.
After that, in this guide to U.S. tax system the next step is to understand the tax brackets.
Interpreting the Tax Code
Understanding the tax code can be difficult for many people. Americans know they have to provide their social security number, prepare their paperwork, and identify any expenses that can be deducted.
In most cases, there are various ways that the average individual can take advantage of the tax system. To understand the tax system, you must understand your tax filing status, deductions, and tax credits. Let’s get into the guide to the U.S. tax System and learn how you file your taxes.
How Do You Choose the Right Tax Filing Status?
When it comes to your filing status, your marital status determined this. You have to choose the right way to file to reflect your situation. Here are the categories.
Married Filing Jointly
This is the category for married couples who want to file taxes together to receive a joint tax return. Married couples will receive a $27,700 deduction this tax year.
Married Filing Separately
The married couples who want to file separately for tax purposes and to ensure larger tax returns can file as individuals. This allows them a $13,850 deduction this tax year.
Single Tax Filers
Just as with those who are married but filing separately, single filers are unmarried individuals. They are also subject to a $13,850 deduction this next tax year.
What are Tax Deductions and Tax Credits?
Deductions and tax credits are essential to understand. Those who understand this portion of taxes can receive a tax break and save more money every year on their taxes.
Tax deductions reduce how much of your income is subject to yearly taxes. However, tax credits are valued per dollar as reductions on your taxes. For example, a tax credit of $1,000 would be a reduction of $1,000 overall.
The Difference Between Standard Deductions and Itemized Deductions
Standard deductions and itemized deductions do differ. Your standard deduction is a total amount applied without categorizing your expenses or other considerations. People usually have to choose between standard and itemized on their taxes when they e-file or file with the IRS.
There are various deductions for both individuals and business owners. For business owners, itemized deductions refer to categories of expenses that people claim every year on their federal and state tax forms.
For instance, people can take a deduction on their meals for business meetings or even in their home office. Other itemized deductions include medical expenses, health care premiums, taxes paid, and charitable donations that individuals or companies may claim.
The U.S. Tax Brackets for 2023
Fortunately, the IRS makes it incredibly easy for people to understand what they will likely pay in taxes. As mentioned, the U.S. runs on a progressive tax system. This means people paying federal or state taxes will pay a certain percentage.
Households who make $22,000 or less only pay a 10% tax on their taxable income unless they already have it deducted from their earnings throughout the year. The tax brackets proceed to 37% for households making more than $693,751.
Navigating the Tax Code as a Business Owner
As a business owner, this beginner’s guide will help you understand how to take advantage of this system and reduce what you pay in taxes. As business owners, you may have to be concerned about the following:
· Income tax
· Self Employment Tax
· Employment Taxes
· Excise Tax
· Property Tax
· Sales and Use Tax
· Estimated Tax
For more businesses, various resources are available to help understand deductions and what you can expect to pay. Your tax rate will be similar to that of an employee, but instead of having money given back in tax returns on Tax Day, you’ll pay in.
Self-Employed Individuals
If you are self-employed, you are subject to taxes if you make over $400 per year. You can expect this to be 12.4% and an additional 2.4% for Medicare tax.
Formal Business Entities
For corporations, LLCs, and other entities, you have to fill out various fundamental forms and are subject to the same tax rates as self-employed people. Your revenue as a business is subject to taxation, but when you claim deductions, you will be able to keep more of your income and investments.
You must understand taxes and your applicable income tax rate as a business owner. Remember: you want the federal government to pay you tax refunds. So when you reach a certain threshold and have certain expenses, you’ll see more of your revenue and ultimately benefit more from your understanding of taxes and what you are paying for.
What Should I Do if I Can’t Meet My Tax Filing Deadlines?
If you can’t meet your tax filing deadlines, don’t panic. If you find yourself unable to pay taxes, there are a few things that you can do. And if you cannot meet your quarterly tax payments, you will have to pay a small fee when you file.
However, if you cannot pay when Tax Day arrives, you should consider entering into a payment plan. You are subject to interest on any money you cannot pay upfront, so it is essential that you file with the IRS when required by law and you ensure that you have enough funds to pay your federal taxes.
When in doubt, don’t be afraid to contact a tax professional. They are just the right people to get in times of need, especially if you have questions about your taxes and how to reduce them.
How Do You Save Money When Filing Your Taxes?
You likely already know the best way to save money: use those federal deductions and pay taxes on time! As a business owner, you have every advantage in your corner, so why let the IRS request the maximum amount of money from you?
As a business owner, do your homework, understand how much you will pay on your earned income, and focus on reducing your tax burden. It is not impossible to save money on your gross income using the tax code, but all it takes is understanding the tax rules and knowing the right person to go to for your tax law-related questions.
Conclusion
We hope this Guide to the U.S. tax system has been helpful for you to learn as citizens how to increase your tax refund and file your taxes properly with the federal government. Be sure to read more about these tax codes, learn the proper forms, and don’t be afraid to seek resources to help you file.
For more information, check out the IRS website. There are a plethora of resources available for American citizens and business owners. So don’t let the tax system scare you. Instead, take advantage of your deductions and get a proper refund today.