The first income tax in the United States was created in 1861 during the Civil War as a way to fund the war. After the war, the tax became unpopular and was not renewed. It wasn't until 1913 that the Sixteenth Amendment of the Constitution was ratified and gave Congress the ability to collect taxes on income. During World War II, payroll withholding and quarterly tax payments were introduced for the first time, which still exists in our modern income tax withholding system.
Federal individual income tax is the tax collected from individuals by the Internal Revenue Service (IRS) on taxable income. The revenue collected through income tax funds federal programs such as Social Security and Medicare. The federal individual income tax is a progressive tax, meaning that the higher the income is, the higher the tax rate will be. For many Americans, payroll taxes are deducted directly from their paychecks.
Virtually all U.S. citizens are subject to federal withholding, unless someone had no tax liability at all the previous year and they do not expect a tax liability in the current year.
Federal Income Tax Information
The federal income tax has seven tax rates that go up as your income does. In this way, the U.S. tax system is progressive. The more taxable income you have, the higher federal income tax rate you are subject to. The less taxable income you have, the lower the federal income tax rates you are subject to. These rates for 2023 and 2024 are 10%, 12%, 22%, 24%, 32%, 35%, 37%.
Taxpayers are not charged a single rate on all of their taxable income. Rather, the government divides your taxable income into brackets, and taxes each bracket of income at its appropriate rate.
Payroll Tax Information
FICA stands for the Federal Insurance Contributions Act and is a federal tax that is withheld from every person's paycheck. FICA constitutes of two taxes: Social Security tax and Medicare tax. FICA taxes are only withheld at the federal level.
Each tax rate will vary depending on if you're an employer, an employee, or self-employed.
Social Security Tax
Social Security is a federal insurance program that provides benefits to retired people and those who are unemployed or disabled. Below are the social security tax rates for 2023/2024.
- The employer social security tax is 6.2% on $160,200 of earned income
- The employee social security tax is 6.2% on $160,200 of earned income. The maximum Social Security tax for employees is $9,932.40
- The self-employed social security tax is the combined employer and employee tax of 12.4% on $160,200 of earned income
Medicare is the United States federal government health insurance program for Americans who are 65 years of age and older. These benefits are intended to cover the costs of healthcare associated with advanced age.
Unlike the Social Security tax, there is no annual limit to the Medicare tax. Below are the Medicare tax rates for 2023/2024.
- The employer Medicare tax is 1.45% on all earned income
- The employee Medicare tax is 1.45% on all earned income
- The self-employed Medicare tax is the combined employer and employee tax of 2.9% on all earned income
- There is an additional 0.9% Medicare tax on wages earned after a $200,000 threshold. This means income after reaching $200,000 in a year will have a 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax), called the Additional Medicare Tax
Federal Unemployment Tax Act (FUTA)
FUTA is a tax that only employers pay. It covers unemployment compensation to workers who have lost their jobs.
- Employers pay 6.0%, less a credit for contributions to state unemployment insurance funds, up to 5.4% on $7,000
- Many employers are entitled to the maximum 5.4% credit, with which the FUTA tax rate is 0.6%
- Certain states have lost part or all of this credit. Employers in those states need to check with their labor department to determine the current allowed credit for the state in question
Federal Minimum Wage
The Federal minimum wage is the minimum hourly rate that a non-exempt employee can be paid. The National minimum wage was enacted in 1938 under the Fair Labor Standards Act (FLSA) and was set at $0.25 per hour. Since 1938, Congress has raised the Federal minimum wage twenty-two times. In addition to the Federal minimum wage, state and local jurisdictions can set minimum wage rates. When federal and local minimum wage rates apply employers are required to pay the higher rate.
- Federal Minimum Wage: $7.25 per hour effective July 24, 2009
Federal Withholding Forms
There are several federal withholding forms. The most commonly used federal withholding form is the Form W-4 and tells your employer how much money to withhold from your paycheck for federal income tax. Completing your W-4 accurately helps avoid too much or too little tax being withheld from your paycheck. There is also a federal withholding form for exempt individuals.
Anytime you move or have a major life change (for example: marriage, divorce, birth of a child) always be sure to complete a new W4.
Federal Paycheck Calculators
Calculate your net pay or take-home pay by entering your pay information and federal W4 information.