It has been said that the only two things we can depend on in life are death and taxes. The latter are the subject of this post, particularly in regards low income earners and federal income tax. There is quite a bit to know here. Needless to say that low income earners do not pay nearly the same amount of tax as their higher income counterparts.
Federal wage taxation occurs directly through two kinds of taxes – income taxes and FICA. Both are withheld from employee paychecks and submitted to the federal government along with the employer’s share. As such, it is not unusual for consumers to not even think about their federal taxes until preparing their returns in the spring.
Income Taxes and FICA
The first thing to note about federal taxation is the difference between income tax and FICA. The former is a tax levied directly against your income. Income tax in this country is progressive, meaning that you pay a higher percentage of your income the more money you make. More on that in just a minute.
FICA is a pair of taxes assessed to pay for Social Security benefits and Medicare. In standard employment relationships, FICA is split down the middle. Both employee and employer pay half. All workers in this country pay FICA regardless of how much money they make.
Income Tax Brackets
Now, let us get back to income tax and its progressive nature. If you are single and make up to $9,700 annually, your income is taxed at a rate of 10%. From $9,701 up to $39,475, your income would be taxed at 12%. There are seven individual tax rates ranging from 10% to 37%. The amount collected depends on whether you file as a single taxpayer, married filing jointly, married filing separately, or the head of a household.
Progressive tax systems like ours are intended to level the playing field by requiring those who earn more to pay a larger percentage of their income. Likewise, low income earners pay a lower percentage of their income. Whether this system is right or wrong is irrelevant. It is what it is.
Low Income Earners and Federal Income Tax
What many people do not understand is that the vast majority of low-income earners end up paying no federal income tax at all. There are several reasons for this. At the top of the list is the standard deduction which now stands at $12,000 per person for those filing as singles or married filers filing separately.
Simple math shows that if you earned $9,700 and then subtracted $12,000 to cover the standard deduction, you would have a negative taxable income $2,300. You would also be eligible for a number of low-income tax credits. Rather than paying income taxes, you would get a refund check from Uncle Sam.
Standard Payroll Deductions
One last thing to understand about federal income tax is that it is assessed through standard payroll deductions. It doesn’t matter whether you have your paycheck direct deposited into your bank account or you receive a paper check that you cash at the bank or a local check-cashing store. Federal taxes are deducted before your employer pays you.
If you are a low-income earner able to take full advantage of the standard deduction and a litany of low-income tax credits, it is likely you do not pay any income tax at all. You do pay FICA. And if you are self-employed, remember that you are responsible for paying your taxes yourself. You don’t have the luxury of payroll deductions and automatic payments.