Types of Taxes
Federal Income Tax
The US has a progressive tax system at the federal level with 7 tax brackets. As your income increases, additional dollars are taxed at higher rates. For 2026, those rates are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
For tax year 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of households.
The federal income tax is a pay-as-you-go tax: you must pay as you earn or receive income throughout the year. If you're an employee, your employer withholds taxes from your paycheck. If you're self-employed or have other income without withholding, you'll need to make estimated tax payments quarterly.
Self-Employment Tax
If you work for yourself - as a freelancer, sole proprietor, or independent contractor - you're responsible for self-employment (SE) tax. The SE tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare.
Why so high? Regular employees split these costs with their employer (each side pays 7.65%). When you're self-employed, you cover both halves. For 2026, the Social Security portion applies only to the first $184,500 of net earnings. Medicare has no income cap.
Employment Taxes (for Employers)
Once you hire employees, a new set of tax obligations kicks in. These are collectively called employment taxes and include three main components:
Social Security and Medicare (FICA): For 2026, the Social Security wage base is $184,500, with both employer and employee paying 6.2%. Medicare tax is 1.45% on each side, with no cap. Employees earning above $200,000 (single filers) also pay an additional 0.9% Medicare surtax.
Federal income tax withholding: As an employer, you must withhold federal income tax from your employees' paychecks based on their W-4 form and the IRS tax tables.
Federal Unemployment Tax (FUTA): The statutory FUTA rate is 6.0% on the first $7,000 of each employee's annual wages. However, employers who pay state unemployment taxes on time receive a credit of up to 5.4%, bringing the effective rate down to just 0.6%. That works out to a maximum of $42 per employee per year in most states.
Some states are designated as "credit reduction" states because they haven't repaid federal unemployment loans on time. For 2026, California and the US Virgin Islands are subject to credit reductions, meaning employers there pay a higher effective FUTA rate.
Capital Gains Tax
When you sell an asset - stocks, real estate, equipment, or a business - for more than you paid, the profit is a capital gain. The tax rate depends on how long you held the asset.
Short-term gains (held one year or less) are taxed at your ordinary income tax rate, which can be as high as 37%. Long-term capital gains (assets held longer than one year) are taxed at three rates: 0%, 15%, and 20%, depending on your taxable income and filing status.
High earners may also owe the Net Investment Income Tax (NIIT) of 3.8% on investment income above certain thresholds - $200,000 for single filers and $250,000 for married couples filing jointly.
Sales Tax
The US has no national sales tax. Instead, forty-five states, the District of Columbia, and some territories impose sales taxes on the sale or lease of most goods and some services.
The five states with no statewide sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon (though local jurisdictions in some of these states may still charge sales tax).
Rates vary widely. Some states charge around 4%, while combined state and local rates can exceed 10% in certain areas. If your business sells products - especially online - understanding sales tax nexus rules (which determine where you're required to collect tax) is critical.
Excise Tax
Excise taxes are special taxes on specific products and activities. You may need to pay excise tax if you manufacture or sell certain products, operate certain kinds of businesses, use various types of equipment, or receive payment for certain services.
Common categories include fuel taxes, environmental taxes, air transportation taxes, taxes on heavy vehicles, and taxes on wagering. Businesses report federal excise taxes on Form 720 (quarterly), while heavy highway vehicle use tax is reported on Form 2290.
Most small business owners won't encounter excise taxes unless they operate in specific industries like fuel distribution, alcohol or tobacco production, or transportation.
Property Tax
Property taxes are administered at the local level (counties and municipalities), not by the federal government. If your business owns real estate, equipment, or other tangible assets, you may owe property taxes to your local jurisdiction.
Rates and assessment methods differ dramatically across the country. Some states also levy a business personal property tax on items like office furniture, machinery, and inventory.
Practical Implications and Conclusion
Taxation, in its various forms, plays a crucial role in shaping economic behavior, redistributing resources, and funding public services. For individuals and businesses alike, understanding the intricacies of different tax types - whether it’s income, consumption, or property taxes—helps in making informed decisions about spending, investment, and financial planning.
In practical terms, taxes affect every facet of economic life. For example, a business deciding whether to invest in new machinery must consider not only the initial cost but also the long-term impact of tangible personal property taxes. Similarly, an individual contemplating the sale of a home must factor in potential capital gains taxes when evaluating financial returns.
