A tax rate is the percentage (0-100%) of your income that is taxed. Taxes are amounts deducted from money that you own or earn. Income tax is the most common application of a tax rate.
To demonstrate this notion, consider someone who recently received $50 for a day’s work. Assume they are required to pay a 10% tax on this amount. After deducting 10% of the $50 worth, our entrepreneur is left with $45. In this scenario, the $50 represents income (or revenue), while the $45 represents profit.
It is also necessary to include brackets when discussing tax rates. Brackets are similar to categories or groups that you belong to based on your income, and they are closely related to rates. To return to our scenario, our worker is still a junior earning $50 per day. Someone who is older and earns $100 per day is expected to contribute more than $10 since their tax bracket is greater.
The purpose of tax rates
In general, tax rates (like taxes themselves) exist to ensure that everyone in a given region may live fairly and comfortably. We pay money to a government (federal, state, or municipal) so that they may take care of our fundamental societal requirements, such as paving and maintaining roads, keeping streets lit and safe, protecting the most vulnerable sectors of the population, and financially supporting us in old age.
Rates are designed to be fair: a billionaire can do a lot more to enhance living in their community than someone earning minimum wage, therefore they are expected to do more. It would be extremely impossible to maintain stability if everyone paid the same amount in taxes, as this would be a financial hardship for a huge portion of the population and a little expenditure for the top incomes.
How tax rates are calculated
Income tax rates are regulated by the federal government and local governments, and they differ for individuals and companies. For example, the federal tax rate for businesses is now fixed at 21%, whereas it may reach as high as 37% for people depending on the brackets.
The rates are established by the United States Congress (House + Senate) depending on the performance of firms and people, the economic prognosis for the next decade, and other considerations. The rates are made final by legislation that is enacted and signed by the president.
Tax rates in 2023
The IRS website has a full list of federal income tax rates. According to these statistics, a single adult with a taxable income of $60,000 would owe $8,817 in taxes.
The tax rates (between 10% and 37%) will stay unchanged in 2023, but the associated brackets will alter. For example, the lowest tax bracket used to apply to income up to $10,275, but it will increase to $11K in the next year – and similar adjustments will apply across the board. This does not necessarily imply that everyone’s wages have increased, but rather that inflation is depressing the value of the dollar.
Taxes paid by non residents
If you are a foreign citizen who does not match these conditions but still has the right to work, you must still pay taxes on ECI (effectively connected income) – any money made in the United States – at the same rates as citizens.
There are several regulations in the United States tax law, as well as numerous exceptions to those rules. Non-residents, for example, may be required to pay lower rates or no rates at all if a tax treaty with the applicable requirements exists between their home country and the United States.
Exempt persons must also be included when discussing foreign nationals.
The IRS categorizes them as follows:
- diplomats and full-time international organization employees
- teachers, trainees, and students
- professional athletes