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What a bizarre system. Tax should be taken from your payslip. There should be no need for the individual to figure out anything, unless they are self employed.
They do deduct taxes from your paycheck. Basically once a year, you have to true up and figure the exact amount you should have paid. If that's less than what was withheld, you get a refund.
Well plus there are taxable events that aren't on your payslip. If you sell goods over a certain threshold. If you get a taxable distribution from an investment account. Etc. Edit: also the IRS doesn't know about what you have that's eligible for deduction.
It is taken from the payslip. But then they have us verify what they already know and if you make a mistake you're punished for it! It's bullshit.
I want so bad for the US to do it the way every sane country does it; they just send me a thing so I can make sure they're accurate and only need to take action if they fuck up.
You can thank Intuit, the company behind TurboTax, for making taxes as difficult as possible. They spend a lot of money lobbying to make filing taxes more difficult.
Income tax always struck me as a deliberate way to make your average joe hate taxes when they could, very easily, be calculated at time of payroll without you ever being shown the “pre tax” amount.
I don't care about seeing the amount or not. I care that I have to deliberately set up my withholdings incorrectly to hopefully not end up owing too much more at the end of the year. If I set it up accurately I would end up owing thousands more.
That's because Republican "tax cuts" are often just a change in the withholding rate.
I'm not sure how withholdings works for your paycheque, but you request where the number is set.
If I set it up accurately
You define what's accurate for a percentage when you set it.
Actually you define the number of deductions to with hold. The more deductions you claim, the less they take out.
Yeah, it's a shit show over here. You kinda guess at how much you will need to pay in taxes, hold back that amount in your paycheck, and hope for the best. And if your life situation changes or the incoming government fucks around with the tax codes, your estimating will be off. Getting it down to a very small refund is the optional solution, but it's not always as easy as you'd think.
And if your life situation changes or the incoming government fucks around with the tax codes, your estimating will be off.
That's kinda what quarterly estimated taxes are for. At the end of every quarter, if things aren't lining up and your estimates were too low, you can pay extra tax to bring things in line.
The estimate doesn't have to be too precise though. At long as you pay at least 90% of what you owe this year or 100% of what you owed last year (whichever is smaller), you'll be fine. Any less than that and you'll be hit with an underpayment penalty.
It's better to owe money rather than get a refund, as long as you pay enough to avoid the underpayment penalty.
I get that it's ideal to owe, but I would rather a refund of a couple hundred dollars than owe a couple thousand. Part of the issue is inconsistent income, though. If it was just a single flat salary for the entire year that should be simple, but when you add in variable pay rates and shift differentials and shift bonuses it all gets messed up.
I totally understand. I hate owing a lot too, but sometimes I get the estimations wrong. I've got a fixed yearly salary, but a big portion of my pay is stock (RSUs) so the tax I owe varies based on when I sell the stock.
A lot of things suck, but setting up your withholding is easy, and in 30 years of paying taxes, I've never accidentally withheld too little.
I hadn't. I've also withheld to much and got a warning letter from the IRS. It's at a point now where things have been optional for the last few years. But with the new tax changes Trump is bringing in, I expect I'll go from getting a small refund to owing a bit next year.
They already do that tho, payroll tax is paid by the employer without the employee every seeing it.
When I was in China as a kid I never saw any visible form of "taxes". I also never heard of any income taxes. I have no idea how the tax thing works, but I'm assuming they just tax the corporations, which solves both the sales tax and the income tax at once.
(Guangzhou, PRC. Other cities might work differently I have no idea tho)
But what about the tax preparation industry? Won't anybody think of the shareholders? For shame.
Yuuuuuuup.
That's how it is here in France. It is calculated according to the previous year income, so if you get a raise you'll have to pay a little bit more at the end the following fiscal year, but that's often very little. Last time I got a 2500€ yearly raise, I had to align something like... 100€ 😆.
Why, though?
I'm in Germany and my employer kind of knows how much they pay me. So they can easily calculate the income tax correctly. It's just assumed that each month's salary is 1/12th of my yearly income and taxed appropriately.
You can literally live your entire life without "doing taxes" even once (though it's a good idea for your individual deductions).
It's the same in the UK - employer deducts the tax and National Insurance (which pays for health care, state pension etc), and most of the time it's correct.
This year I had to do my own tax calculation because of an inheritance, and it was such a pain! But I got some guidance from the HMRC phone line and filed the return online. It turned out I owed a lot less than I'd thought.
We are taxed on more than just wages. Additionally, the way tax law is structured here, because of S-corporations and partnerships (structures which own/run companies), these both flow through activity to the individual tax payer which is then taxed at that level.
If it's just wages, lots of Americans work 2, 3, or even more jobs (not just during the year, but at once). Our tax rate tables are set up so you calculate them based on you having one job, so when we start a job it's calculating it at only that one income.
Even in Germany you typically get a little money back if you do your taxes as a regular employee. Though that's far, far better than owing the state money at the of the year.
Might be because of tax brackets and not knowing ahead of time if you're getting a raise. E.g. maybe you are the top of some bracket for most of the year, and youre on track for not surpassing it by the end of the year. Then you get a raise near the end and it bumps you over.
Should they take a huge amount off your last couple payslips? Or just let you pay it in taxes later?
Might be better for some people to pay via taxes instead of automatically losing the money for that month.
Just a guess though.
That's a solved problem, though (and I described it in my comment). If you always assume the current month's payment is 1/12th of your yearly salary, you already pay according to the tax bracket relevant to you. You might overpay a bit, but most people don't double their income within a year, so the refund is typically not that much.
I agree that the employer part should be more automatic, but don't forget it may not the the only income. You can have properties, you can have share and dividends. All that do not happen all at the same time, so it is far easier to calculate on an earlier snapshot than continuously recalculate every time something changes.
Taxes are taken from the payslip, but there's a bunch of other things that can affect your income taxes. For example, you need to pay income tax on bank interest and capital gains tax on investments you sold during the year. There's also a bunch of deductions that reduce your taxable income - for example, if you have a mortgage, you can deduct some of the interest.
Of course, the IRS should already know most of this stuff, so I'm not sure why they make us tell them again.