Tax Season with Jade
"Know your worth & then add tax "
How Income Tax Works
The Internal Revenue Service (IRS) collects taxes and enforces tax law in the United States.2 The IRS employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc.3 The agency collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.
Individual Income Tax
Individual income tax is also referred to as personal income tax. This type of income tax is levied on an individual’s wages, salaries, and other types of income. This tax is usually a tax that the state imposes. Because of exemptions, deductions, and credits, most individuals do not pay taxes on all of their income.
The IRS offers a series of income tax deductions and tax credits taxpayers can use to reduce their taxable income. While a deduction can lower your taxable income and the tax rate used to calculate your tax, a tax credit reduces your income tax obligation.
The IRS offers tax deductions for healthcare expenses, investments, and certain education expenses. For example, if a taxpayer earns $100,000 in income and qualifies for $20,000 in deductions, the taxable income reduces to $80,000 ($100,000 - $20,000 = $80,000).
Tax credits help reduce the taxpayer’s tax obligation or amount owed. They were created primarily for middle-income and lower-income households. To illustrate, if an individual owes $20,000 in taxes but qualifies for $4,500 in credits, their tax obligation reduces to $15,500 ($20,000 - $4,500 = $15,500)
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not collect state income taxes. New Hampshire doesn’t tax earned wages, but it does tax income earned from interest and dividends. At the end of 2023, New Hampshire will begin phasing out these taxes, and all personal income in the state will be tax free by 2027
Businesses also pay income taxes on their earnings; the IRS taxes income from corporations, partnerships, self-employed contractors, and small businesses.10Depending on the business structure, the corporation, its owners, or shareholders report their business income and then deduct their operating and capital expenses. Generally, the difference between their business income and their operating and capital expenses is considered their taxable business income.
International Fuel Tax Agreement (IFTA)
Under this program, a truck is IFTA registered and obtains a fuel tax permit from one state. When the vehicle drives through any participating state or province, the tax on fuel purchased there is credited to the permit owner’s account. At the end of the quarter a fuel tax report is completed that shows miles traveled and gallons of fuel for each region.
IFTA assists in calculating the amount of tax due or tax credit for each state, to determine the tax liability for each and to oversee the distribution of funds accordingly.
FILING REPORTS WITH IFTA
For filing IFTA claims, at the end of the fiscal quarter the licensee produces a fuel tax report listing miles traveled in all participating jurisdictions and gallons of fuel purchased there. Supporting documents include the vehicle mileage record, distance records, fuel records and tax-paid retail fuel purchase receipts. All relevant data such as gap miles and fuel receipts must be included when reporting IFTA claims.
A payroll tax includes the taxes employees and employers pay on wages, tips, and salaries. For employees, taxes are withheld from their paychecks and paid to the government by the employer. These taxes include federal, state, and local income taxes, and the employee's share of Social Security and Medicare taxes (FICA). Taxes that employers must pay include their share of FICA as well as federal and state unemployment taxes.
Quarterly Sales Taxes
Depending on the volume of sales taxes you collect and the status of your sales tax account with Florida, you may be required to file sales tax returns on a monthly, semi-monthly, quarterly, semi-annual, or annual basis. Each sale, admission, storage, or rental in Florida is taxable, unless the transaction is exempt. Sales tax is added to the price of taxable goods or services and collected from the purchaser at the time of sale.
Florida's general state sales tax rate is 6% with the following exceptions:
Retail sales of new mobile homes - 3%
Amusement machine receipts - 4%
Rental, lease, or license of commercial real property - 4.5%
Electricity - 6
Use tax is due on the use or consumption of taxable goods or services when sales tax was not paid at the time of purchase. For example:
If you buy a taxable item in Florida and did not pay sales tax, you owe use tax.
If you buy an item tax exempt intending to resell it, and then use the item in your business or for personal use, you owe use tax.
If you buy a taxable item outside Florida and bring it into (or have it delivered into) Florida, and you did not pay sales tax on the item, you owe use tax.
Self- Employment Taxes
What Is Self-Employment Tax?
The self-employment tax is a tax on people who work for themselves—like independent contractors and small-business owners and it funds Social Security and Medicare. Normally, your employer pays half of this tax and automatically withholds the other half out of your paycheck. But self-employed folks are stuck paying the whole thing themselves.
Self-Employment Tax Rate for 2023–2024
The self-employment tax rate for 2023–2024 is 15.3% of your net earnings. It’s made up of 12.4% for Social Security and 2.9% for Medicare.These taxes are often called the FICA tax, which stands for Federal Insurance Contributions Act. (You’ve probably seen FICA as a line item on a paystub at some point and wondered, Who the heck is FICA and why are they taking my money?)
Tax Deductions for Self-Employment
The Schedule C IRS form lists a bunch of expenses you can deduct from your income if you’re self-employed. Remember, deductions lower your net income, and that means your self-employment tax will be lower. That means deductions are a good thing. Some of the most common deductions are:
Advertising and marketing
Computer equipment and software
Travel and business meals
Make sure to keep receipts and invoices for all these expenses in a central location. And no, your wallet stuffed with coupons, cash and cards is not the place for them. Having detailed records will make tax time much easier and protect you if the IRS ever audits you.
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
Generally, you must pay SE tax and file Schedule SE (Form 1040 or 1040-SR) if either of the following applies.
If your net earnings from self-employment were $400 or more.
If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.