What Taxes Need to Be Properly Reported and Paid?

Governments at the federal, state, and local levels impose various taxes to fund public services like infrastructure, education, and public safety. Understanding which taxes apply to your personal earnings, business activities, and property is the first step toward ensuring compliance. These obligations vary based on overlapping jurisdictions, making a clear comprehension of each tax type necessary for accurate and timely payment.

Taxes on Personal Earnings and Investments

Federal income tax is levied on an individual’s annual earnings, including wages, salaries, tips, and other income. The federal system is progressive, meaning tax rates increase as income rises through a series of brackets. To determine the final amount of income subject to tax, individuals can reduce their gross income by taking either a standard deduction—a fixed dollar amount—or by itemizing deductions, which involves tallying up specific deductible expenses like mortgage interest and certain medical costs.

Many states and some local municipalities also impose their own income taxes. These taxes operate independently from the federal system, with rules, rates, and deduction methods that vary significantly. Some states have a progressive bracket system, while others apply a single flat rate to all income levels, and a handful of states do not impose any income tax.

Self-employment tax applies to income earned by independent contractors, freelancers, and other sole proprietors. It is composed of Social Security and Medicare taxes, analogous to the FICA taxes paid by employees and employers. Self-employed individuals are responsible for paying both the employee and employer portions, totaling 15.3% on net earnings, though a portion of this tax can be deducted.

Profit from the sale of assets like stocks, bonds, or real estate is subject to capital gains tax. The tax treatment depends on how long the asset was held. Short-term capital gains, from assets held for one year or less, are taxed at the same rates as ordinary income. Long-term capital gains, from assets held for more than one year, are taxed at lower, more favorable rates.

Taxes for Business Owners and Employers

Employers are responsible for handling payroll taxes. This includes the Federal Insurance Contributions Act (FICA) tax, which funds Social Security and Medicare. Businesses must withhold this tax from their employees’ gross wages and pay a matching amount from its own funds, effectively doubling the contribution sent to the government for each employee.

Employers also pay unemployment taxes to fund benefits for workers who have lost their jobs. The Federal Unemployment Tax Act (FUTA) imposes a federal tax on a portion of each employee’s wages. Businesses must also pay state unemployment taxes (SUTA), and these state payments can be credited against the amount owed for FUTA.

A business’s structure determines how its profits are taxed. Corporations are subject to a corporate income tax at the federal and often state level, paid directly by the company on its net profits. In contrast, profits and losses from pass-through entities, such as S corporations and partnerships, are not taxed at the business level. The income “passes through” to the owners, who report it on their personal tax returns.

Taxes on Property and Purchases

Property taxes are levied by local governments on the assessed value of real property, including land and any structures on it. These taxes are a primary funding mechanism for community services such as public schools, law enforcement, and fire departments. The tax amount is calculated by multiplying the property’s assessed value by the local millage rate and is paid to the local taxing authority.

Sales tax is a consumption tax applied to the sale of most goods and many services. State and local governments set their own sales tax rates. Businesses are required to collect this tax from customers at the point of sale and remit the funds to the government.

Use tax complements the sales tax, applying to taxable items purchased from an out-of-state seller where sales tax was not collected. For instance, if an item is bought online from a vendor that doesn’t collect sales tax for the buyer’s state, the consumer must pay the use tax directly to their state. This system ensures tax equity between local and remote purchases.

Excise taxes are levied on specific goods or activities, such as gasoline, tobacco, and alcohol. These taxes are often built directly into the product’s price, so consumers may not see them as a separate line item. The revenue is often used to fund related expenditures, such as using gasoline taxes for highway maintenance.

Taxes on Wealth Transfers

The federal government imposes a gift tax on transfers of property or money to another person without receiving equal value in return. The tax code provides an annual exclusion, allowing an individual to give up to a specific amount to any number of people each year tax-free. For 2025, this amount is $19,000 per recipient.

Gifts exceeding the annual exclusion must be reported and count against the giver’s lifetime gift and estate tax exemption. This unified exemption shields a large total value of transfers from being taxed during a person’s life or after death. For 2025, the exemption is nearly $14 million per individual, but this amount is scheduled to be reduced significantly in 2026 unless Congress acts to extend it.

The estate tax is levied on a person’s assets transferred to heirs upon death, including cash, securities, and real estate. The tax applies only to the portion of an estate’s value that exceeds the remaining lifetime exemption amount. Because this exemption is high, most estates do not owe any federal estate tax.