Topic 07 of 20
Tax basics for your first returns
Taxes feel complicated because the vocabulary is unfamiliar, not because the idea is hard. Through the year, money is set aside from your pay. Once a year, you tell the IRS what you actually earned, and you either get some back or pay a little more.
Tax basics guides
The yearly tax cycle
- Start a job. You fill out a Form W-4, which tells your employer how much federal income tax to withhold from each paycheck.
- Through the year. Income tax, Social Security and Medicare taxes come out of each paycheck. If you work for yourself, nobody withholds for you, so you set money aside and may need to pay estimated taxes during the year.
- Early the next year. Employers send a W-2. Clients and platforms may send 1099 forms. Banks send forms for interest earned.
- Filing season. You file a return that totals your income, subtracts deductions, figures your tax and compares it with what was already paid.
- Refund or balance due. If too much was withheld, you get a refund. If too little, you pay the difference.
Employee vs self-employed
As an employee, you and your employer each pay half of Social Security and Medicare taxes, and your employer withholds income tax. As an independent contractor or gig worker, you pay both halves of Social Security and Medicare yourself through self-employment tax, in addition to income tax, and you can deduct business expenses. The difference is large enough that comparing a W-2 job and a 1099 job by hourly rate alone can mislead you.
Deductions and credits in one paragraph
A deduction lowers the income that gets taxed. Most people take the standard deduction, a fixed amount set each year, instead of listing individual deductions. A credit lowers the tax itself, dollar for dollar, which makes credits more valuable than deductions of the same size. Some credits, such as the Earned Income Tax Credit, can produce a refund even if no tax was owed.
Filing for free
The IRS lists free ways to file, including guided software for people under an income limit and free fillable forms for anyone comfortable doing the math. Volunteer programs also prepare returns for free for many people. Compare these before paying for an upgrade.
Watch for tax scams
The IRS generally contacts people first by mail. It does not demand payment by gift card or wire transfer, and it does not threaten immediate arrest by phone. If in doubt, sign in to your IRS online account or call the IRS directly.
Tax season checklist
Tick items as you go. Ticks stay on this page only and clear when you leave.
Questions people ask
Why did I get a refund?
A refund means more was withheld from your pay during the year than your actual tax bill. It is your own money coming back, not a bonus. Adjusting your W-4 can change how much is withheld.
What happens if I file late?
If you owe tax, penalties and interest can apply for filing and paying late. If you are owed a refund, there is generally no penalty for filing late, but you must claim it within the IRS time limit or lose it.
Do I file state taxes too?
Most states have their own income tax return; a few have no individual income tax on wages. Check your state's revenue department, especially if you moved during the year or work in a different state from where you live.