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Global Work Glossary

How does Federal income tax impact employees?

Federal income tax (FIT) is a crucial aspect of taxation in the United States, serving as the largest source of revenue for the federal government. Here's everything you need to know about federal income tax:

What is Federal Income Tax?

Federal income tax is a tax levied by the Internal Revenue Service (IRS) on the annual earnings of businesses, individuals, trusts, and legal entities. It applies to all earnings contributing to a taxpayer’s taxable income, including wages, salaries, commissions, bonuses, and interest earned on savings accounts.

Who Pays Federal Income Tax?

All residents and citizens of the United States are subject to pay federal income tax. While not everyone needs to file a tax return, tax filing status is determined by total income and employment status. In most instances, employers withhold federal income tax from employees' wages based on Form W-4 and relevant documentation.

Taxes for Remote Workers

For remote workers, taxes can be complex, especially on an international level. U.S. workers pay taxes where they physically work, not where their employers operate. U.S. citizens living abroad should also consider foreign tax credits, foreign earned income exclusion, and U.S. tax treaties.

How to Calculate Your Income Tax

Federal income tax rates are calculated using a progressive tax system, meaning that tax rates increase as taxable income increases. Tax brackets are used to determine tax payments, with different rates applying to different income ranges.

Tax Deductions

Tax deductions, including credits and deductions, can lower the amount of tax owed. Tax credits incentivize various activities such as job creation and child care expenses, while deductions reduce taxable income.

Federal vs. State Tax

State income tax is paid in addition to federal income tax, with rates varying from state to state. However, several states do not withhold state income tax.

Understanding federal income tax is essential for individuals and businesses to fulfill their tax obligations and make informed financial decisions. By comprehending the intricacies of federal income tax, taxpayers can effectively manage their tax liabilities and maximize tax benefits.

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