Sometimes I see on American TV that once a year (I think) they try to figure out how much tax they owe and send off a cheque. How does this really work?
Id struggle very much to calculate this. Do you keep receipts for everything?
Is there no system where taxes are automatically taken out of your monthly wages? Id be interested to hear some examples of what you pay, and how you calculate it all if possible.
In the UK pretty much every has monthly tax taken automatically, unless you are self employed.
The way it works for me for example last month I made:
£2282.58 and £435.92 was deducted. £247 in tax and 98.77 national insurance. £90.15 went to my pension.
So what would your payslip look like? No deductions? Or am I just getting the wrong idea from America TV shows?
Thanks
A typical employee would have taxes taken out of every paycheck. Employers calculate that assuming they are your only source of income and you have nothing interesting going on tax wise, which is correct for 90% of people. Employees can ask for their income tax withholding to be changed and employers will do so no questions asked [1]. At the end of the year, you’re employer will give you a form W2 that says how much they payed you, how much they paid in taxes on your behalf, how much they payed into your tax deductible account on your behalf, etc. Basically everything about your job that is tax relevant. A copy of this W2 form is sent to the IRS.
If you have investment accounts, work as an independent contractor, or various other forms of income, you will generally be given a form 1099. Again, a copy of this will be sent to the IRS. Income tax is not automatically withheld from these, so if you get a lot of income through them, you may owe taxes at the end of the year.
You may also qualify for tax deductions that lower your effective income for the purposes of computing your income tax. For instance, the interest on you mortgage, charitable donations, etc. However if you choose not to claim these, you can instead claim a deduction of about $14,000; which is more than most people would be able to deduct anyway, so there often isn’t a point of keeping track of these.
There are a couple of less common situations that you may need to deal with
You can deduct significantly more than the standard deduction, so actually need to keep track of all of your possible deductions.
You are self employed. In this case, you need to keep track of your business expenses, as those are deductible. You also do not have anyone taking out your income tax for you, so you are responsible for making sure you have enough saved come tax time (these tend to be the people who have problems). You are also supposed to pay taxes quarterly.
You have a significant amount of income that is not from a single W2 employer. This can be multiple W2 jobs, 1099 jobs, investment income, proceeds from criminal activity, etc.
You make a significant amount of money from unreported cash tips. (In practice, you can underreport this and no one will know).
You choose to deduct your state’s sales tax instead of your states income tax; and do so by actually tracking how much you pay in sales tax instead of estimating it based on your income.
Having said all of that. For 99% of taxpayers, the IRS knows exactly how much you owe; because all of your income was reported to them, as was your only significant deductions, and nothing else matters because you just take the standard deduction for the rest. The IRS could send you a bill/refund based on this and let the remaining 1% file if the IRS gets it wrong. However, that would collapse the tax preparation industry, so companies like TurboTax have lobbied against it for years.
What actually happens instead is you go to TurboTax, upload all of the forms that were sent to the IRS, and let them file taxes on your behalf. This service was “free” until they were sued for false advertising on account of charging money.
[0] At least for income tax. There’s a few other taxes on payroll that you cannot change.
[1] Assuming you asked in the form of a properly filled out W4.