The Internal Revenue Service (IRS) is a United States government agency tasked with collecting yearly income tax from working residents and businesses. Most citizens pay income tax to the agency annually, though in some cases, quarterly prepayments are required for freelancers and businesses that exceed a given income threshold. The IRS is part of the Department of the Treasury.
Income and state taxes are based on the calendar year, with annual payments due no later than the following 15 April, in most cases. The process of submitting tax forms is called filing taxes. A request for an extension is acceptable, but estimated payments must accompany the extension request, which must be filed early.
IRS taxes are calculated on a sliding scale, with higher incomes commiserate with higher tax brackets. Though the exact tables change yearly, simply put, the more a person earns, the more he or she pays. For those paid hourly wages or earning a salary, estimated taxes are taken from each paycheck. At the end of the year, an individual may get a refund for overpayment, or be required to pay more tax if an insufficient amount was deducted throughout the year.
Income tax is based on net income, or the amount left after legally allowed deductions have been taken from the gross (total) income. A person who falls within the poverty bracket may not be required to pay income tax at all, while a modest salary of $50,000 US Dollars (USD) per year can end up costing the earner approximately 20% of his or her net income. Someone earning $120,000 USD annually might fall into a tax bracket closer to 25% of the net income.
Following this logic, it would seem that a person or business making millions annually would pay the IRS an even higher percentage, but in cases of extremely high revenues, various accounting strategies, tax shelters, and write-offs can result in significant tax breaks, and in some cases, tax refunds. For this reason, the middle class is commonly said to shoulder the biggest tax burden.
Forerunner to the IRS was the Bureau of Internal Revenue, which President Lincoln started in 1862 with the help of Congress. Income tax was earmarked to pay for civil war expenses and was intended to be temporary. In 1872, the income tax was repealed, only to be enacted once again in 1894. While the Supreme Court challenged the constitutionality of the 1894 statute based on a technicality dealing with population density and appropriate taxation, the way was later cleared. Ratification of the 16th Amendment in 1913 removed the problematic language, opening the door to continuing income tax laws. The Bureau of Internal Revenue eventually became the Internal Revenue Service.
Along with income tax, state taxes must also be paid to the appropriate agency, where applicable. In states where state tax applies, it is withheld from each paycheck year round in addition to federal income tax. Since state tax is far less than federal, the amount withheld normally satisfies the requirement, and often a small refund may be in order for overpayment.
The IRS website provides downloadable forms, frequently asked questions (FAQs), and many helpful pages for preparing tax forms. There are also software programs designed to prepare tax forms for wage earners. People who don’t feel qualified to prepare their own taxes can have certified public accountants (CPAs) prepare and submit them for a fee.