Understanding Federal Tax in the United States

The term 'federal tax' encompasses a variety of taxes collected by the federal government in the United States. These taxes include income tax and payroll tax, among others. While these two taxes are often discussed together, they are distinct and serve different purposes within the U.S. tax system.

What is Federal Tax?

‘Federal tax’ refers to any tax collected by the federal government, which is the highest level of government in the United States. Federal taxes are primarily levied on income and payroll, but also include numerous excise taxes on goods and services. This article aims to clarify the differences and similarities between income tax and payroll tax, and how they contribute to the overall federal tax.

Components of Federal Tax in the U.S.

1. Income Tax: This is the tax levied on the income earned by individuals and corporations. In the United States, the federal income tax is a progressive tax system, meaning that the tax rate increases as the taxable income increases. It applies to all income, including salaries, investments, and business profits.

2. Payroll Tax: This refers to the taxes paid on wages by both employers and employees. Payroll taxes consist of two main components:

FICA (Federal Insurance Contributions Act): This tax covers Social Security and Medicare. The employer and employee each pay 6.2% for Social Security and 1.45% for Medicare, totaling 15.3% for each tax year. FUTA (Federal Unemployment Tax Act): This tax is paid by employers only, at a rate of 6%, to fund unemployment benefits.

What Exactly is Federal Income Tax?

The federal income tax is derived from the exercise of federal privilege, measured by the amount of earnings resulting from that privilege. Essentially, individuals and businesses are taxed on their federally-privileged earnings. The term 'federally-privileged' refers to the legal and regulatory advantages provided by the federal government, such as the right to operate a business, engage in certain financial transactions, or receive certain services.

However, people often question why those earning in the private sector are paying federal income tax. This is due to a complex system where employers submit W-2 and 1099 forms to the IRS, claiming a portion of the employees' income as federally-privileged earnings. These forms are filled out under the mistaken belief that they must report the earnings of their employees.

Challenges and Solutions

Despite these complex claims, the process of challenging and refiling accurate tax returns is relatively straightforward. This involves identifying the correct tax base and ensuring that taxes are only paid on federally-privileged earnings. Many resources are available to help individuals navigate this process, such as the publication 'Lost Horizons' which provides detailed guides on how to file accurate lawful tax returns and keep your money.

Conclusion

Federal tax in the United States includes both income tax and payroll tax, among other types of taxes. Understanding the nuances between these taxes, and how they function is crucial for ensuring compliance and financial clarity. By clarifying these points, individuals and businesses can better manage their tax obligations and ensure they are only paying on federally-privileged earnings.

To learn more about tax compliance and lawful filing, refer to the resources mentioned in this article. For further assistance, consult a qualified tax professional or legal advisor.