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Introduction-Chapter1 - ACC

Introduction-Chapter1 - ACC - 6 How are federal state and...

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6. How are federal, state, and local income taxes collected by the government? Consider the cases of an employee and a self-employed taxpayer Federal income tax is based on self-assessment and voluntary compliance with the tax law. Taxpayers determine in privacy the amount of their income, deductions, and tax due. This system relies on honesty and integrity of taxpayers in determining their tax payments. When tax payers file their tax returns, the prepaid amounts are credited against their actual bill, resulting in either a refund of taxes, if the prepaid amount is greater than the actual tax, or an additional tax due, if the prepaid amount is deficient. Self-employed taxpayers must make quarterly estimated tax payments that are applied against their tax bills upon filing of the return. Employees pay social security taxes that are matched by their employers. Self-employed individuals pay the equivalent of both halfs of the social security tax by paying the self-employment tax.
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