Qualifying individuals are required to pay income tax to the US Government’s Internal Revenue Service (IRS). Income tax is taken as a percentage of that individual’s taxable income, which is their gross income minus allowable deductions, such as charity donations, medical expenses, and student loan repayments.
There are two different types of taxable income: earned and unearned. Earned income is the money an individual receives from their employer (such as wages and sick pay), money a self-employed person earns for their work, pension funds, or unemployment benefits. In contrast, unearned income is the interest and dividends you earn on your investments.
Gross Income vs. Net Income
Employees receive their earnings either as net income or gross income.
Gross income is the total amount of all income received from any source, including wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, and pensions.
Net income is the total amount of money you take home after taxes, benefits, and voluntary contributions are deducted from your gross income.
When income tax is automatically deducted from gross income, it means the employer has paid the tax to the government on the employee’s behalf. The amount your employer withholds from your gross income for taxes depends on how much you earn and the information you gave on your Form W4.
Tax Rates
The federal income tax system in the US is progressive, which means the more you earn, the more tax you pay. This system aims to help lower-income individuals earn more money while collecting more taxes from higher-income individuals.
Individuals fall into different tax brackets based on their income and marital status. For a single taxpayer or a married taxpayer who is filing separately from their spouse, the income tax rates for 2025 are:
- 10% for those earning between $0 and $11,925
- 12% on anything earned between $11,925 and $48,475
- 22% on anything earned between $48,475 and $103,350.
- 24% on anything earned between $103,350 and $197,300
- 32% on anything earned between $197,300 and $250,525
- 35% on anything earned between $250,252 and $626,360
- 37% on anything earned above $626,360
For example, a single person with taxable income of $45,000 per year will pay 10% tax on the first $11,600 they earn, then an additional 12% tax on the next $33,400.
If you are married and filing a tax return jointly with your spouse, then the tax rates for 2025 are:
- 10% for couples jointly earning between $0 and $23,850
- 12% on anything earned between $23,850 and $96,950
- 22% on anything earned between $96,950 and $206,700
- 24% on anything earned between $206,700 and $394,600
- 32% on anything earned between $394,600 and $501,050
- 35% on anything earned between $501,050 and $751,600
- 37% on anything earned above $751,600
For example, if a married couple’s joint taxable income is $200,000, they will pay 10% tax on the first $23,850, 12% tax on the next $73,100, and 22% on the remaining amount.
Why Do I Pay Income Tax?
In the US, income tax is the largest source of federal tax revenue. in the US. When you pay taxes, you’re investing in the US economy, as the government uses the funds to:
- Build, repair, and maintain infrastructure
- Fund the pensions and benefits of government workers
- Fund Social Security programs
- Fund health programs, such as Medicare and Medicaid
- Fund safety net programs for lower-income households
- Fund defense and national security programs
- Provide programs for education, health, agriculture, utilities, and public transportation
- Provide emergency disaster relief