How to understand state and federal taxes.
If you will be working in the U.S. you will need to know about both state and federal taxes. Taxes are paid by both U.S Residents and U.S. citizens, and pay for the government services that are provided. There are several different types of taxes, including additional taxes when you purchase property or buy an item at the store. If you are employed by an employer, all ‘taxable income’ should have the taxes automatically withheld, but there are some exceptions to this rule.
The exact amount of taxes withheld from a paycheck will be completely dependent upon the amount that you earn. An employer will give you a Federal Tax Form W-9 to complete and this will include your name, address, social security number and the number of ‘deductions’ you will claim. If you do not have a Social Security number, and are a resident alien (permanent resident), you can apply for a Taxpayer Identification Number (TIN) at your local Social Security Administration office or get the online form at www.ssa.gov.
Each state in the U.S. has their own set of regulations regarding state taxes. Some states have amounts withheld from a paycheck and then you are required to file a State Tax return during the same time period as the Federal Tax return. Other states do not have that requirement. All states have a ‘sales tax’ as well as other types of taxes that you pay upon the purchase of items. Each state has a specific percentage defined for the purchase. Some of the states will not include items such as ‘food purchases’ as taxable items. You will need to examine the state requirements for the state you reside and work in.
All Federal taxes must be applied to what is considered ‘Taxable Income’. This is any income that is earned in the United States and/ or its territories. The Internal Revenue Service (I.R.S.) form W-9 will allow you to indicate the number of deductions that you will be claiming when you file your taxes and that number will reflect the amount of tax taken out. An example of deductions would be: “1” for yourself, “2” for yourself and a spouse included on your jointly filed tax return, “3” for yourself, spouse and a child that you are supporting in your home. Seek the assistance of an accountant if you have any questions regarding the form or go to the website of: www.irs.gov.
Exceptions to Automatically Withheld Taxes
Not all employers automatically withhold taxes. There are specific guidelines employers must follow if you are a full time employee. However, if you are considered to be a subcontractor or freelance contractor, an employer does not have to withhold taxes. In these cases, you will be required to pay your own taxes during the tax filing time period. You will need to have the ability to pay your taxes during the filing process and this may require that you set aside the money that will be needed during the working year.
Most Americans have difficulty understanding the Federal and State tax guidelines, so it is important that you seek the services of a reputable accountant. An accountant will advise you on the various deductions you can take advantage of so that your tax payments are reduced. The accountant will also advise you of the required paperwork you will need to keep throughout the year as proof of your deductions and can file your State and Federal tax forms for you. Ask friends and co-workers for a reference for a good accountant and make an appointment as soon as you begin working. This smart move will often save you the expense and time in the long run, once the tax filing season is upon you.