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Financial Literacy

Financial Literacy

Home Financial Literacy Taxes Shmaxes Types of Taxes on Income

Types of Taxes on Income

Payroll Taxes

Payroll Taxes are the taxes that employers are required to withhold from employees pay for the purpose of paying the federal income tax. This process is known as withholding, but federal income taxes are not the only thing that employers must withhold from your paycheck.

FICA Tax

Under the Federal Insurance Contributions Act tax commonly known as the FICA tax (though you can call it whatever four-letter word you’d like), employers are required to withhold funds from wages and salaries for the purpose of funding Social Security and Medicare. Employees are only required to pay half of their FICA obligation; the other half must be matched by employers. (The total amount withheld from an employee’s salary for FICA is 6.2% for Social Security (up to the first $102,000) and 1.45% for Medicare.)

If you think a total of 7.65% is bad for FICA taxes then hopefully you never plan on being self-employed. Self-employed individuals must pay BOTH the employee and employer share of FICA taxes, or a whopping 15.3%. Quite a price to pay just so you can have a “World’s Best Boss” mug sitting on your desk.

Federal Unemployment Tax

There is one additional tax that an employer must pay on behalf of an employee, and that is the federal unemployment tax. Although this tax does not come directly from your paycheck, it does significantly increase the costs of hiring for any corporation. The unemployment tax is 6.2%, but fortunately it only needs to be paid on the first $7,000 of compensation each year.

Capital Gains Tax

This is a tax on the gains upon sale of a non-inventory asset such as stocks, bonds, or property (including your mint condition, still-in-the-box Star Wars figurines) which have been owned for more than a year. However, not all distributions from assets are taxed as capital gains. For example, dividends from stocks are taxed at the rate of ordinary income, not at the capital gain rate. This is because capital gains tax is only paid on the gain upon sale of an asset. While a bad stock may kick you in the financial asset, it does not qualify as one.

Corporate Tax

The corporate tax is just as it sounds: a tax on the profits of corporations. The taxation for specific corporations is largely dependent on their corporate structure (meaning that most small businesses are taxed differently than large corporations), but for most large corporations, taxes on profits can be as high as 35% and as low as 15%. Taxes for small businesses are usually taxed as income to owners, effectively bypassing most of the corporate tax. Fortunately, there are no taxes for incredibly small businesses, such as your little sister’s lemonade stand.

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