Taxes 101: What Gets Taken and Why
Taxes are one of the most important — and least taught — parts of personal finance. This lesson covers how income taxes work, what you actually owe versus what gets withheld, and what to do at tax time so you're not caught off guard.
Two types of taxes on your income
When you earn money, two types of federal taxes come out. Income tax funds the general federal budget. FICA taxes (Social Security and Medicare) fund specific programs — retirement benefits and healthcare for people 65 and older. Both are automatic; they come out of every paycheck.
Funds general government. Rate depends on how much you earn.
Fixed rate: 6.2% Social Security + 1.45% Medicare = 7.65% total
How tax brackets work
Income tax in the US is progressive — higher income is taxed at higher rates, but only the portion above each threshold. If the first $11,000 is taxed at 10% and the next bracket is 12%, someone earning $15,000 pays 10% on the first $11,000 and only 12% on the remaining $4,000 — not 12% on everything.
This is your marginal rate (rate on your last dollar) vs. effective rate (average across all income). Your effective rate is always lower than your marginal rate.
Filing taxes
Filing means submitting a tax return each year (by April 15 for most people) showing how much you actually owed versus what was withheld. If more was withheld than you owed, you get a refund. If less, you owe the difference. With one simple job, the IRS Free File program walks you through it in about 30 minutes.
What young people often miss
If you're a dependent on your parents' taxes and had income, you may still need to file your own return. Multiple jobs in a year make underpayment more likely. Freelance or gig work may mean owing self-employment tax (15.3%) that was never withheld — awareness now prevents surprises later.
You're in the 12% tax bracket. Does that mean you pay 12% on all your income?
Recap
- Income tax and FICA are both withheld from paychecks automatically.
- Tax brackets are progressive — only income above each threshold is taxed at the higher rate.
- Filing a return reconciles what was withheld versus what you owed — refund or bill depends on the difference.
- Next up: Path 3 begins — what a stock actually is, explained without jargon.