The government charges an income tax which is mostly based on how much money, or income, you earn in a year. This includes your salary, as well as the dividends, interest, rents, lottery winnings, the earnings from a business you own, and unemployment earnings, basically any money you earn. 

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Who pays income tax?

When you hear "income taxes", its usually what we call "individual income taxes"—paid by workers and other people with income. However, corporations and a lot of other types of entities also pay income tax on their profits.

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In addition to the federal income tax system, thee are also state income taxes that must also be filed according to the state in which you reside. For example, as of 2019, only seven states do not charge an income tax, which includes Florida, Alaska, Texas, Wyoming, Washington, Nevada, and South Dakota.

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Reporting Income Tax

While the U.S. income tax system is a voluntary system, it does not mean that paying the income tax is optional. The federal government relies on each taxpayer to voluntarily report all of their income on a tax return and calculate the appropriate tax using current tax laws.

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The Internal Revenue Service, or IRS, has precautions in place to make sure you comply with the system. "For example, the agency receives a copy of your W-2 every year, and if you don’t file a return, it can easily calculate the tax for you and send you a bill. Additionally, the IRS can charge you interest and penalties, and even commence a criminal action against you, but only in the most severe and egregious of cases. This is a fundamental difference between income taxes and other forms of taxes, such as sales taxes, which retailers calculate and consumers pay at the time of purchase" (TurboTax, 2019).

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