It's April 14. Here in the USA, federal tax returns or applications for time extension are due on April 15. So I went to the IRS web site to get a Form 4868 (application for an extension) ... and found out that because of COVID the deadline has been moved to May 17. I'm sure it was on the news but somehow I missed it. So I can procrastinate for another month! Yippee!
shareMy taxes are done and filed, but I did know about the extension, which included my state return. However, I still need to help my brother file his - he's dyslexic and struggles with reading. My mom used to help him but she's gone now, and the two girlfriends he's had since she died have both passed away. So I've stepped in to help him.
Good luck with yours, BullSchmidt!
Can you give me an idiot's guide to the way this works please? I've often wondered when i see it on tv.
This is not a thing in Britain.
Well, only the self employed/businesses do tax returns. Individual citizens don't have to do them.
Here in the States, if you earn over a certain income you have to file an annual Federal Tax Return (and also a State return in certain states). Here's an example of income brackets and tax rates:
https://www.bankrate.com/finance/taxes/tax-brackets.aspx
Used to be that you had to file your returns manually and mail them in (I refer to this as the "nightmare era.") Now, there are plenty of automated online tax return programs where you just plug in all your information (salary income, investment income, deductions, etc.) and your return is sent directly to the IRS. When all the numbers are crunched, you know whether you owe money to the IRS or you will receive a refund check from the IRS.
I'll add to that, as a point of interest to those outside the US -- here, the post office is by law an agent of the federal and states' governments. "Agent" in this case being a legal term. If X is Y's agent, when you deal with X in that capacity then as far as the law is concerned you're dealing with Y directly. I mentioned the April 15 deadline in my reply below. Tax returns don't have to be received by the IRS by April 15, merely put in the mail on or before that date. The Baltimore post office used to stay open until midnight on that day, and they'd have postal workers standing outside -- you could just roll down your car window and hand your mail to them. (They might still do that but I don't know, I haven't lived there in a long time.)
shareOK. Here, when you get your paycheck, you don't get all of your income. Parts are withheld for various purposes. A typical worker gets about 65% of his or her income. The other 35% goes to several things, including federal income tax. The other withholdings are state income tax, FICA (social security), and usually health care insurance and a retirement investment account. So let's say you're working at $50/hour and you work a 40 hour week. Assuming no overtime, you'll earn $2000 per week, but you'll get about $1300 per week.
When a business pays its employees, it also takes that money it withheld for federal income tax and hands it over to the government. It does this by depositing it in an account at the local bank. All our banks, the Federal Reserve, and the US Treasury are all linked together, so this can be done at any bank. I was self-employed about 25 years ago, so I've done this but my memory is hazy now, but from what I recall it was no more difficult that depositing money into my own account.
Employees can adjust how much is withheld for taxes by filling out a small form which the employer keeps on file. The amount owed is a function of how much one earns, but there are several other things that come into play. All other things being equal, the more dependents you have the less your tax. The system is set up so that the average taxpayer can just put in the number of dependants on this form and the tax withholding comes out about right. But person with unusual financial arrangements can use that form to adjust their taxes too. There's no requirement that a person have actual dependents when entering that number. For example, one year when I was working for someone else but was also starting my own business on the side, I knew I would lose money in my side business at first and so my total taxable income would be less than what my employer was paying me. I entered 4 on that form, as if I had a wife and two kids, even though I was single with no children.
In January, an employee receives a form from his or her employer which states how much was withheld in the prior calendar year for state and federal income tax. The employee fills out a tax return form which calculates what is actually owed. There are various versions of this form which the employee can use. For example, a person fresh out of school, unmarried, with no children, renting his or her housing, probably would be OK using the simplest "EZ" (easy) form. Anyone can use the EZ form but it doesn't allow for various different types of deductions, which in that person's case wouldn't be relevant anyway. There's a longer version of the form which does allow for those deductions, and several optional other forms which can be used for those with unusual or complex financial situations.
So, the employee fills out that form, which computes how much was owed in taxes from the prior year, then compares that to what was withheld. If too much was withheld, the employee will someday -- when the IRS gets around to it -- receive a refund in the mail. If not enough was withheld, the employee writes a check for the difference and sends it the the IRS along with that form.
All of this is tracked by taxpayers' social security numbers. SSNs were originally intended to be used only for the social security system, but they're also used now for credit reporting and other things. It's very important to keep ones SSN secret; inadvertantly revealing it to identity thieves can make your life quite unpleasant.
The tax form is due on April 15. A taxpayer can file for an extension, which is automatically granted. In that case the taxpayer does not have to submit the form until October 15. However, s/he must still be paid up in full on April 15. For example, if the taxpayer anticipates owing $2000, then he or she must enclose a $2000 check with the extension application. Failure to do that isn't a big deal, but it will mean being charged interest on that amount.
Taxpayers can get extensions in some other ways. Remember the movie, Apollo 13? The astronaut Jack Swigert had neglected to file his tax return on time, but it turned out to not be a problem as he got an automatic extension because by law anyone who is out of the country on April 15 gets one -- and he was definitely out of the country, by about 200,000 miles.
Sounds like a pain in the ass !! Great answer though, thanks. Must be difficult when getting a new job to figure out how much cash you will actually be picking up each week.
How do professions that use tips as wages calculate this ?
It's nowhere nearly as time consuming as it might sound. From the taxpayer's perspective, nearly everything is done automatically. There is the little form to fill out authorizing your employer to withhold so much per pay period for federal tax, but that takes under five minutes to do. https://www.irs.gov/pub/irs-pdf/fw4.pdf
Most employees don't have to redo that form very often. Things that might cause it to be necessary are a new baby, buying a house, starting ones own business, stuff like that.
Apart from that, the employer and the IRS handle everything as far as payroll, withholding, et cetera. The form the employee receives in January looks like this: https://www.irs.gov/pub/irs-pdf/fw2.pdf
Here's another one, harder to read, with sample data filled in: https://payroll.vpfinance.virginia.edu/system/files/Sample_Form_W-2.pdf
I've never worked in a place where tipping was an issue, but Box 1 in that form gives total "wages, tips, and other compensation," so I guess the employer tracks tips along with everything else.
Another thing to keep in mind is that the income is not taxable until the employee actually receives it. If your employer owes you back pay, neither you nor your employer owe anything to the IRS until you get that paycheck. I ran into this situation when I went self-employed. No revenue was going to be coming in at first. That was fine, I had enough savings to live on until that happened. But I had my sole employee -- me -- on salary. When the time came I would write myself a big check, for back pay. But did that mean I had to start withholding and paying money to the IRS now, while I was working but not being paid yet? No, my accountant explained to me. Nothing was owed until I actually wrote the paycheck. So even if an employee's hours per week vary wildly, the taxes are just withheld as they happen.
Once that form is received, the taxpayer has to prepare the annual tax return, which is a pain in the ass. The form itself is only two pages: https://www.irs.gov/pub/irs-pdf/f1040.pdf
It might also be necessary to attach other forms. For example, in connection with Line 7 it might be necessary to attach Schedule D.
The instructions to fill it out are 115 pages, though: https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Complicating all this is that there are many things a person can do to reduce taxable income. Charitable contributions and interest paid on mortgages are generally excluded from taxable income, for example. Like I said, a young person just starting out and with an uncomplicated financial life can fill out the form unaided easily enough, but for the rest of us with homes, investments, et cetera, some sort of professional assistance is often needed.
Figuring out how much you're going to take home each week from a new job isn't difficult. All other things being equal, unless your income changes dramatically the proportion of your gross pay that you'll take home as net pay stays about the same. If you were taking home 70% of your gross pay on your old job, and you changed jobs for a 10% higher salary, you'll be taking home about 70% of your gross pay there too. Same logic with hourly wage jobs. If you work a few extra hours one week, your take home pay increases proportionally allowing for "time and a half."
Ah ok, yes that makes sense. Thanks for taking the time to explain it to me.
Now get off here and file your own tax return 😉
Do my tax return? Lord, no! I've still got a full month to procrastinate! There's a lot of beer than can be drank in a full month ,..
One final side note I'll add, which will probably be a surprise even to others in the USA. The IRS likes entrepreneurs. Taking employees is how they get their money, and we're the ones who create those jobs. By law, the IRS cannot give advice, they cannot say, "you should do X" in any situation, but they can be very helpful in spelling out what your options are and explaining things. At least that was my experience with them.
thaks for the explanation
withhold so much per pay period for federal tax
Sounds pretty much the same as the UK system (in the simplest cases) except you have to "get involved" once a year just to confirm your situation .