What taxes are associated with earnings?



Income Tax: Income tax has to be paid on "ordinary income"—money earned in compensation for work, whether in the form of wages, tips, or salary.  For 2016, anyone filing as a single individual pays 10% on the first $9,275 of income, 15% on the $9,276 up to $37,650 earned, and so on through the "tax brackets."  In the top tax bracket, every dollar earned in excess of $415,051 is taxed at the top "marginal rate," which is currently 39.6% .

If you are self-employed, there will be no automatic tax withholding from your income.  However, the government does not want to wait a whole year to receive your tax payments.  Self-employed individuals who expect to owe at least $1,000 in federal income taxes for the year are required to pay estimated taxes every quarter and to square up in April of every year.

FICA (Federal Insurance Contributions Act) Tax:  FICA tax, also known as Social Security and Medicare tax, must be paid by all employers and employees, with self-employed individuals paying both components.  Under FICA, approximately 7.65% of ordinary income earned by a worker must be paid towards Social Security, and approximately 2.9% must be paid towards Medicare.  Half of the tax is paid by the employee, and half by the employer. The Social Security tax is applied only to the first $118,500 or so of the individual's compensation, while the Medicare component has no limit.  FICA tax is not reported on your income tax return.

Capital Gains Tax: Capital gain is generally a gain on the sale of personal assets or investment property. The amount of tax you pay will depend on a number of factors, including how long you have held the property.

  • Short-Term: Capital gains income from assets held for one year or less is taxed at the ordinary income tax rates in effect for the year.
  • Long-Term: Capital gains from assets held longer than one year are generally taxed at a special long-term capital gains rate, which depends on your ordinary income tax bracket.  For 2015, the long-term rates range from 0% to 20% depending on your income, with an additional 3.8% net investment tax for income individuals in higher income tax brackets.




IMPORTANT NOTE: The information provided to you on this page is limited in scope and should not be your only resource for completing your tax returns. We recommend you seek advice from a licensed tax professional.

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