What are taxes? Taxes are funds that companies and individuals must pay to the government for the purpose of funding government operations.  Taxes are mandatory and cannot be avoided.

A tax system is common in most countries. It allows for the payment for national, and  public needs as well as for government functions. Revenues from taxes finance  such things as roads and schools, or programs such as Social Security and Medicare.

There are many types of taxes to be aware of, including sales taxes and federal income taxes. The Internal Revenue Service, or IRS, collects federal income taxes within the United States. Other taxes are collected locally or regionally. Taxes are the main source of revenue for governments.

What are the various types of taxes? The majority of taxes can be broken down into three categories: taxes on your earnings, taxes on the things you buy, and taxes on what you own.  Examples include Income Tax, Sales tax, and Property Tax. With this in mind, here is a quick overview of the most important types of taxes that you need to know to be a competent taxpayer.

Let’s discuss Income tax.  For income tax, a percentage of income is remitted to the federal or state governments.  Income earned, salaries and wages, tips and commissions are all factors that affect taxes including unearned income, such as interest.  Income taxes are paid by individuals and businesses. Individuals pay personal income taxes, and companies pay corporate  taxes. Income taxes are usually collected by both the federal and state governments.

If you are an employee, another tax you are likely to be paying, is Payroll tax.  Payroll tax is a percentage taken from the pay of an employee by an employer.  Payroll taxes are used to finance social insurance programs, such as Social Security and Medicare.

Next is sales taxes.  Sales taxes are charged at the point where a customer makes payment for a product or service. The customer pays the sales tax to the business, which then remits it to the government. These taxes are on goods purchased, such as the items you purchase at retail. Groceries, gasoline for your car, and other items are all examples of goods with sales taxes. 

Another main type of tax is Property tax.  Property tax is based on land value and property assets. This tax is based upon the property or real estate that individuals or businesses have. Every county and every local municipality has its own tax rate. Commonly, the county collects this tax.

You should be aware that these taxes are collected at different times.  For example, If you make $3,000 a month, and are taxed at 10%, $300 should be deducted from your paycheck to pay taxes.  If you then use the money you earned to go shopping for a new cell phone for $500, and your local sales tax is 7%, you will pay another $35 in taxes.  In total, though not all at once, $335 of your monthly $3,000 in income is collected in taxes.

So where is the tax money being used? Depending on which level of government the tax was paid to, it may be used to fund various things. The government uses the tax money to purchase items and services. These items are available at the local, state and federal levels. These items are often considered public goods or things. They are most beneficial to the majority of people. Examples include transportation, education and health care. Tax paid to the local government can be used to build schools or parks. Tax paid by the federal government can also be used to fund social security and defense programs.

You may be asking, are taxes too much to pay?  There are many opinions on how high taxes should go. Some argue that taxes should not be too high to prevent the economy from growing. Others believe that strong taxation distributes income and provides for the common good. Schools, roads and hospitals depend on your contributions to taxes.

In summary, there are many tax types that can be applied in different ways. Understanding taxation can help you gain a better understanding of how your money is taxed. Taxes are something you can’t avoid. Understanding how taxes work can help you make smart decisions about managing your finances and maximizing your net income.