How US Tax System Works

How US Tax System Works

The US Tax system is set up on both federal as well as state level. There are several types of taxes such as: income, sales, capital gains, etc. Federal and state tax systems are totally different and each has its own authority to charge taxes. The federal government doesn’t have the right to interface with state taxation. Every state has its own tax system and is independent from other states. Inside the state there might be several jurisdictions that also charge taxes. For instance, countries or towns may charge their own school taxes that are additional to state taxes. The American tax system is very complex.

Income Tax

Income tax is likely one of the most well known types of taxation. If any of your earned income in the U.S. you will see the deductions on your paycheck. Each individual who earns in the U.S. is liable under US income tax system and supposed to pay income tax on both the federal and state level. Federal Taxes include social security and FICA. Each state has its own type of income tax that employers withhold from your paycheck. If you earn more than a specific sum, you must file both federal and state taxes before April fifteenth of every year.

Sales Tax

One more type of tax that you will turn out to be very familiar with is sales tax. This is the tax that is charged on your purchases, for example, you buy a pack of gum. Sales tax is a state tax and varies from one state to another as well as within the state. For example, NY State Sales Tax is 7% and NJ is 3%, however Albany has 8% sales tax while Syracuse has just 7%. Within the state, municipalities reserve the right to raise the sales tax over the state limit. There are also different guidelines surrounding sales tax, for example, like things are taxed and which are not. For example, in New York gum is taxed, but milk isn’t. In NJ food is taxed, but garments are not. As you can see the tax system in this nation is quite complex.

Also, the various types of taxes, there are also discrepancies among people and organizations.

As stated above, people should file their income tax on or before April fifteenth every year. If the individual has a sole proprietorship, those profits will be included for their personal income tax form. If a person is part of a partnership, their profit from the organization will be included for their personal income tax form. There are no taxes on the partnership as a whole, however on the income passed down to the partners. Partnerships are expected to file a tax return, but it is just an informational return.

Enterprises are a different legal entity and are dependent upon corporate tax on taxable income. Corporate tax rates are unique compared to personal tax rates. Corporate incomes are subject to twofold taxation. This means that corporations pay taxes on their profit and then with after tax income they pay stockholders dividends, which are subject to capital gains tax. The dividends should be accounted for on the stockholder’s individual tax form and are taxed at capital gains tax rates. This is ordinarily called twofold tax taxation.


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