Federal taxes are the mandatory payments the United States government collects to fund national defense, infrastructure, Social Security, Medicare, and the general operations of the federal government. The largest share comes from individual income taxes, followed by payroll taxes. Congress gets the authority to levy them from Article I, Section 8 of the Constitution and, for taxes on income specifically, from the Sixteenth Amendment.1Constitution Annotated. Article I Section 8 – Enumerated Powers2Constitution Annotated. Sixteenth Amendment There are several distinct types, and most people pay more than one.
The Federal Income Tax
The income tax applies to what you earn during the year: wages, salaries, investment returns, and business profits. Rates are progressive, meaning higher slices of income get taxed at higher rates. For 2026, the brackets run from 10% on the lowest slice up to 37% on income above $640,600 for single filers and $768,700 for married couples filing jointly.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Moving into a higher bracket doesn’t retax everything you earn at the new rate. Only the portion of income that falls within a given bracket is taxed at that bracket’s rate.4Internal Revenue Service. Federal Income Tax Rates and Brackets
How Taxable Income Is Built
The rates don’t apply to every dollar you take in. First, certain adjustments come off your gross income to produce your adjusted gross income (AGI). Contributions to traditional retirement accounts and student loan interest are two common ones.5Internal Revenue Service. Adjusted Gross Income Then you subtract either the standard deduction or your itemized deductions from AGI. What’s left is your taxable income, and that’s the number the brackets act on.6Internal Revenue Service. Definition of Adjusted Gross Income
For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Most filers take it rather than itemizing, because their mortgage interest, charitable gifts, and state taxes rarely add up to more.
Capital Gains and Investment Income
Profits from selling investments are taxed on a different schedule. Hold an asset for more than a year and the gain qualifies as long-term, taxed at 0%, 15%, or 20% depending on your taxable income. Sell within a year and the gain is short-term, taxed at your ordinary income rates.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Higher earners owe an additional 3.8% Net Investment Income Tax on investment gains, rental income, dividends, and similar income. The surtax starts once modified AGI passes $200,000 for single filers or $250,000 for married couples filing jointly.8Internal Revenue Service. Net Investment Income Tax
Payroll and Self-Employment Taxes
Payroll taxes fund Social Security and Medicare. Rather than going into the general fund, they’re routed to trust funds that pay retirement, disability, and hospital insurance benefits. The statute behind them is the Federal Insurance Contributions Act, or FICA.9Social Security Administration. What Is FICA
Social Security
The Social Security tax runs 12.4% total, split evenly at 6.2% between you and your employer. It only applies up to a wage base limit, which for 2026 is $184,500. At or above that threshold, the maximum Social Security tax for the year is $11,439.10Social Security Administration. Contribution and Benefit Base
Medicare
Medicare tax is 2.9% total, again split 1.45% each between employee and employer. There’s no wage cap; every dollar you earn is subject to it.11Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates An Additional Medicare Tax of 0.9% applies to earnings above $200,000 for single filers and $250,000 for married couples filing jointly. Your employer’s share doesn’t rise; the extra falls entirely on the employee.12Internal Revenue Service. Topic No. 560, Additional Medicare Tax
If You Work for Yourself
When you’re self-employed there’s no employer to cover the other half. You pay the full 15.3% (12.4% Social Security plus 2.9% Medicare) on your net self-employment earnings, with the same $184,500 wage base for the Social Security portion and the same 0.9% additional Medicare tax above the thresholds above.13Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) You can deduct half of your self-employment tax when calculating your AGI, which puts you roughly on par with a W-2 employee whose paycheck never showed the employer share to begin with.14Internal Revenue Service. Topic No. 554 – Self-Employment Tax
Corporate Income Tax
C corporations pay a flat 21% federal tax on net profits. Most smaller businesses aren’t C corporations. Sole proprietorships, partnerships, and S corporations don’t pay corporate tax; their profits pass through to the owners’ personal returns and get taxed at individual rates.15Internal Revenue Service. Forming a Corporation C corporation earnings face double taxation: 21% at the corporate level, then again at the shareholder level when distributed as dividends.
Excise Taxes
Excise taxes attach to specific goods and services rather than income. The federal government imposes them on gasoline, airline tickets, tobacco, alcohol, and indoor tanning services, among others. The tax is usually built into the price you pay, so it isn’t always visible.16Internal Revenue Service. Basic Things All Businesses Should Know About Excise Tax Some excise revenue is earmarked; the federal gasoline tax, for instance, funds the Highway Trust Fund for road and bridge projects.17Internal Revenue Service. Excise Tax
Estate and Gift Taxes
The federal estate tax applies to property transferred at death, including real estate, investments, bank accounts, and life insurance proceeds.18Internal Revenue Service. Estate Tax Only the portion of an estate above the exemption is taxed, at a top rate of 40%. For 2026, the individual exemption is $15,000,000 and a married couple can shelter up to $30,000,000 combined.19Internal Revenue Service. Whats New – Estate and Gift Tax Because of that threshold, the estate tax reaches only a small fraction of families.
The gift tax is the estate tax’s companion, meant to keep people from giving away wealth during their lifetime to avoid estate tax. For 2026, you can give $19,000 per recipient per year (or $38,000 as a married couple) with no reporting.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Amounts above that don’t necessarily produce a tax bill; they reduce the same $15,000,000 lifetime exemption shared with the estate tax, and gift tax is only owed once that lifetime exemption is used up.19Internal Revenue Service. Whats New – Estate and Gift Tax
Credits vs. Deductions
Two mechanics reduce what you owe, and they don’t work the same way. A deduction lowers your taxable income; its value depends on your bracket, so a $1,000 deduction saves $240 for someone in the 24% bracket but only $120 for someone in the 12% bracket. A credit reduces your actual tax bill dollar for dollar. A $1,000 credit saves $1,000 whether you earn $40,000 or $400,000.
Credits split further into refundable and nonrefundable. A nonrefundable credit can bring your tax to zero but no further; the leftover just disappears. A refundable credit pays you the difference as a refund. Some credits are partially refundable. Two of the biggest household credits are the Child Tax Credit, worth up to $2,200 per qualifying child under 17 for 2026,20Internal Revenue Service. Child Tax Credit and the Earned Income Tax Credit for low- and moderate-income workers, which reaches a maximum of $8,231 for families with three or more qualifying children.
Filing, Deadlines, and Estimated Payments
Most individuals file Form 1040 by April 15 each year. For the 2025 tax year, the IRS opened the filing season in late January 2026 with an April 15, 2026 deadline.21Internal Revenue Service. IRS Opens 2026 Filing Season22Internal Revenue Service. About Form 1040, U.S. Individual Income Tax Return When the deadline falls on a weekend or holiday, it shifts to the next business day.
W-2 employees mostly settle their obligation through paycheck withholding, so filing is a reconciliation that produces either a small balance due or a refund. People with significant income outside withholding (self-employment, freelance, rental, or investment income) generally have to make quarterly estimated payments. For the 2026 tax year, the four due dates are April 15, 2026, June 15, 2026, September 15, 2026, and January 15, 2027.23Internal Revenue Service. Estimated Tax Estimated payments are typically required if you expect to owe $1,000 or more at filing.24Internal Revenue Service. Estimated Taxes
What Happens If You File or Pay Late
The IRS charges separate penalties for late filing and late payment, and the failure-to-file penalty is by far the steeper of the two. Filing late costs 5% of the unpaid tax for each month or partial month the return is overdue, up to 25%. When a return is more than 60 days late, the minimum is the lesser of $525 or 100% of the tax owed.25Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges
Late payment runs at 0.5% of the unpaid balance per month, up to 25%. If your return is filed on time and you’re on an installment agreement, the rate drops to 0.25% per month. Interest accrues on top of penalties; the rate for individual underpayments in early 2026 is 7% per year, compounded daily.25Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges26Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 If you can’t pay in full, file anyway and pay what you can; the penalty difference is large.
How Long to Keep Your Records
The IRS generally has three years from your filing date to audit a return and assess more tax. That window stretches to six years if you underreported income by more than 25%, and there’s no limit if you filed fraudulently or never filed.27Internal Revenue Service. Time IRS Can Assess Tax Match your record-keeping to those windows. Three years covers most situations. Hold six years’ worth if you have any concern about underreporting. Keep property records (cost basis, improvements, depreciation) until at least three years after the sale, since you’ll need them to figure the gain. Employment tax records should be kept at least four years.28Internal Revenue Service. How Long Should I Keep Records