April 4, 2020

How Do Taxes Work? Key Things You Need to Know

What you need to know about taxes.

From The California Business Journal Financial Newswires.

If you’re wondering “How do taxes work?”, you’re not alone. Almost half of Americans don’t know which tax bracket they’re in. Understanding taxes isn’t as hard as it seems. With our handy guide, you can learn more about taxes before you have to file in April.

How Do Taxes Work?

Taxes are determined by your total income. If you are traditionally employed, your employer will give you a W-2. This tells you how much money you earned during the tax year, as well as how much money you’ve already paid into state and federal taxes.

If you are self-employed or a contractor, you will receive a 1099 tax form. Unlike conventional jobs, the entities who pay you do not send money to the IRS per paycheck.

The United States has a pay-as-you-go tax system. Self-employed people should make estimated payments to the IRS as the year goes on so they do not have to make a large payment in April.

Tax Brackets

The amount of taxes you pay is determined by your tax bracket. The more money you make, the higher your tax rate is.

Only the portion of your income that falls within a tax bracket will be taxed at that rate.

For example, a single person who makes $50,000 per year will pay the following taxes in 2020:

  • The first $9,875 taxed at 10%
  • The amount between $9,875 and $40,125 ($30,250) taxed at 22%
  • The remaining balance of $9,875 at 24%

Tax brackets are the most complicated part of understanding taxes. There are plenty of online calculators out there if you don’t want to do the math yourself.

Deductions and Tax Credits

Deductions affect the income you claim, while credits affect the money you owe.

If you donated money to charity, for example, you can receive a deduction on your taxes. You can either fill out an itemized deduction or do a standard deduction.

Or, if you are a student, you can receive a tax credit, even if you didn’t earn enough money to file taxes that year.

An accountant or an online service will help you maximize your deductions and credits.

File on Time

Once it’s time to file taxes, you will fill out a 1040 tax form. You can either fill it out yourself, use an online service, or hire an accountant.

If you are unsure about the best option, PayStubCreator has an excellent reference guide.

Even if you can’t pay your tax liability in full, it’s important to file on time to avoid penalties. You can set up a payment plan if needed.

If you owe money, you’ll either send a check to the appropriate agency or send the payment electronically. If you are receiving a refund, you can choose to receive a check or a direct bank deposit.

After you’re done, be sure to keep your tax return copy. You might need it for the following years’ taxes or in case the IRS audits you.

Have a Better Understanding of Taxes

You no longer have to wonder, “How do taxes work?” every tax season. This year, you have the information needed to file your taxes with confidence.

Do you have any tips and tricks for filing taxes? Let us know in the comments below!

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