© 2015 Shmoop University, Inc. All rights reserved.
Finance

Finance

Home Finance Taxes Types of Income Taxes

Types of Income Taxes

It's payday.

Wait, let's start over.

It's payday!

You get to grab that big check (or, uh, see it automatically deposited in your bank account) and go to show it off to your pet iguana.

Hang on. Is there some money missing from your paycheck?

Welcome to the wonderful world of the working stiff.

Now that you're old enough to earn a wage, you're also old enough to have the government swoop in and take some of it before you can even imagine spending it.

What are all those deductions? Let's take a look.

Payroll Taxes

Your boss has to withhold payroll taxes from your paycheck so that your federal income tax is paid. The process is known as withholding, but you can also think of it as "sucking some of the joy out of getting paid."

Oh, that doesn't help? Sorry.

FICA Tax

It's a four-letter F-word for a reason.

The Federal Insurance Contributions Act tax (also known as FICA tax) is an amount your boss has to withhold to pay for Medicare and Social Security. You pay half of the FICA tax and your boss pays half. If you work at a traditional job, you're going to pay 7.65% in FICA taxes (6.2% for Social Security—up to the first $102,000 of wages—and 1.45% for Medicare).

Bad news for the self-employed, though. You have to pay 15.3% for both the employee and boss's portion. It's the cost of being able to work in your comfy bunny pajamas, we guess.

Federal Unemployment Tax

You don't see this deduction because your boss has to pay it. The federal government collects about 6.2% of the first $7,000 you earn each year for this tax. While you don't have to worry about it, it does mean that hiring you and having you on staff costs the company extra money.

No wonder the boss is so grumpy around the water cooler.

Capital Gains Tax

If you have property, bonds, stocks, or other assets that aren't inventory and decide to sell after owning them for more than a year, you may have to pay capital gains. It may not affect your paycheck, but if you're trying to create some extra revenue to tide you over by selling some of your investments, this tax may cost you some money.

Just to keep you on your toes, you won't always have to pay this tax on money you make through investments. If you earn dividends from your stocks, you'll be charged taxes at a regular income rate instead. The capital gains tax is only charged on the gain you earn when you sell an asset.

Thanks, IRS (we guess).

Corporate Tax

If you own your own business, you will be charged corporate tax. How much you pay will depend on how successful you are and how much you earn. It will also depend whether you're a small business or a big corporation. If you make it big and build an empire, for example, you may be charged anywhere from 15-35% (and probably closer to 35%). Tiny businesses (like your little brother's business selling leashes for turtles) won't be taxed. If he makes it big and turtle leashes become a thing, though, the IRS will come calling.

People who Shmooped this also Shmooped...

Advertisement
Advertisement