Revenue derived from taxation is an important source of funds for governments at the city, state and federal level. Tax revenue normally comes from direct taxation, government fees and licenses. Taxes help maintain the operations of governments across the country, which includes public services like public schools, emergency services and roads.
Property tax is assessed on land and improvements such as homes and businesses. According to the U.S. Department of the Treasury, property tax applies in some form in all 50 states and commonly supports local community services, not states. Although the property tax formula varies, the tax is based on a percentage of the value of the property, and from that percentage the tax is parceled out to support county or local governments and school and water districts.
Personal Income Tax
Income taxes are assessed by the federal government and most states. Personal income tax is based on income earned and is progressive, which means you are taxed at a higher rate the more money you make. According to the Internal Revenue Service (IRS) the only states that do not require residents to pay income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming.
Sales taxes apply to sales of certain goods and services. The U.S. Department of the Treasury indicates there are three common types of sales tax: vendor tax, consumer tax and a combination. A vendor tax applies to the business owner for the privilege of doing business in a particular state and consumers pay consumer tax as a percentage of the purchase. A combination of sales and consumer tax imposes a tax on retailers, who are required to pass the tax onto customers.
The majority of states impose a tax on corporate income. The method of taxation varies by state and is commonly a flat percentage rate or a graduated percentage that increase as a corporation generates more income. Some states keep corporate income tax rates low to encourage business activity in the state.
Small businesses like sole proprietorships and partnerships are not taxed directly. Instead, income from these businesses passes to the owners and taxed as income tax instead of corporate income tax.
If you are self-employed, you are responsible for paying self-employment tax (SE tax) to cover for your Medicare and social security coverage. This coverage provides retirement, disability, survivor and medical benefits. According to the IRS, you are responsible for paying SE tax if your net self-employment earnings are more than $400 during the year.
Employers are responsible for making tax payments for each of their employees. The IRS indicates that these federal tax responsibilities include paying a tax for Medicare, social security, withholding for federal income tax and a tax for federal unemployment insurance (FUTA) coverage. Additional employment taxes apply but vary by state.