Taxation in the United States
The U.S. tax legislation is a large set of rules that you should approach with utmost care while managing your company or living in the U.S. If you have any plans to live in the United States, start a company, or buy a home or business, it is very important that you obtain at least the basic knowledge of U.S. tax legislation, and act accordingly. Otherwise, you may have to face consequences of some irreversible mistakes.
The tax system in the United States is generally progressive. In other words, as the level of income or profit increases, more taxes are collected & a higher tax rate is applied.
The main taxes in the United States are listed below, in order of importance:
Most Important Taxes in the United States
1. Income Tax
Income tax is levied on individuals or companies.
Direct deductions from individuals’ salaries are called “withholding tax”. This tax is paid automatically, and deposited into the relevant account of the Internal Revenue Service www.irs.gov . As a general rule, income tax is paid until April 15th of each year. Until this date, most individuals are usually left with a small amount of tax liability, which can be completely paid off when the remaining amount is also paid. Otherwise, if excessive withholding tax is paid until this period, the excess amount can be returned to the person. In some cases, such taxes can be deducted from other income items; such as, dividends and interest.
Companies pay corporate tax based on their commercial profits. The amount of corporate tax liability varies according to the type of company (sole proprietorship, partnership, limited partnership, limited liability or incorporation).
Capital Gains Tax can be considered as complementary to the income tax. It is collected over the profit received from the sale of an asset. It can cause double taxation as it is usually collected in addition to the corporate tax.
2. Estate & Inheritance Tax
Estate Tax is imposed through calculating the net value of an individual’s property or financial savings (in other words, taxable estate, after any exclusions or credits) inherited at the time of death of a person. The tax is paid by the estate itself before assets are distributed to heirs. Inheritance tax is the tax that heirs pay when receiving the inheritance. While there is no federal inheritance tax, there is a federal estate tax.
3. Gift Tax
It is a tax payable to the Federal State, and sometimes to the relevant State when some money or property (the value of which is above a specified amount) is transferred as a gift, i.e. without payment or a valuable exchange in return. The donor (rather than the recipient) is liable for the tax.
4. Federal Payroll Tax
In general terms, it consists of the sum of FICA Tax (7), Medicare (8) and unemployment insurance tax (9). Payroll tax is mainly for social security purposes. Considering the sum of federal, state and local government revenues in the United States, it is the second largest source of tax revenue after income tax. Even if the payroll tax liability is legally partially or wholly on the employers, in practice, the majority of this tax is paid by employees.
5. Sales Tax
It is the tax levied on retail sales of goods and services. This tax is transferred to the government by the business that sells the product. Almost every State and local government in the U.S. collects sales taxes. In order not to increase the cumulative tax burden (avoiding “tax pyramiding”), B2B transactions may be exempted from sales tax.
There are two types of sales tax:
General sales tax: It is imposed on most products.
Excise tax: It is imposed on certain products or activities; such as, gasoline, cigarettes, alcoholic beverages, insurance premiums, and betting, etc.
6. Property Tax
Property tax is primarily imposed on immovable property; such as, land, buildings, real estate, or sometimes on movable assets; such as, jewelry, vehicles or equipment. In this context, a valuation is done about your assets, taking into account criteria; such as, the number, size, location, and past financial performance of the assets. The tax amount is determined according to this valuation. Property taxes are a very important source of revenue for states and local governments.
7. FICA Tax
FICA stands for the “Federal Insurance Contributions Act”. This tax is collected in order to be transferred to the elderly and disabled persons or their spouses. It is a withholding tax deducted directly from the paycheck of individuals. It is paid jointly by employers and employees.
8. Medicare (MEDFICA Tax)
Medicare is a health insurance program. This tax is collected for the health care expenses of certain persons (employees, retirees and their spouses) who have reached the age of 65. This tax is also deducted from the paycheck of individuals through withholding.
9. Unemployment Insurance Tax
Employers pay unemployment insurance taxes to the federal and state governments as imposed on paychecks of their employees.
The tax rate and the cap vary depending on the history of unemployment claims against the company, and the health of the relevant state’s unemployment insurance trust fund, among other factors. New businesses pay a new employer rate since sufficient history is yet to exist on unemployment claims.
10. Tariffs
Tariffs are taxes (customs duties) imposed on products or services imported into the United States. Some products or services may be exempted from customs duties. With the exception of exempt products/services, individuals or companies are liable to pay import taxes when they import products or services into the U.S. (The Competent Authority: U.S. Customs and Border Protection www.cbp.gov)
“In this world, nothing is certain except death and taxes.”
Benjamin Franklin, 1789
Contact 7/24
You can send all your questions about your transactions on American tax and accounting 7 days / 24 hours.
Practical & Reliable Solutions
After analyzing your needs for the U.S. market, we offer you appropriate and practical solutions.
Let’s Grow Your Business
We prepare short-term solutions, and medium and long-term plans for the growth of your company in the U.S.
You may want to go to the U.S. for many different reasons: Vacation, education, academic research, starting or buying a company, opening a bank account, buying real estate, renting a warehouse, doing market research, attending a fair or conference, getting medical treatment, getting married or engaged, etc. The U.S. requires different types of visas according…
Suppose you have decided to enter the U.S. market… In this case, you will also need to build a management team based on your needs for this competitive marketplace. It would be useful if some of this management & operations team is preferably based in the U.S.How carefully and professionally you build this team will…
Starting a business in the U.S. itself is a serious business … The United States is one of the largest and homogeneous markets in the world, with its wide geography and consumer base open to new products and services. The U.S. market, where consumption culture is extremely influential, has a wide consumer base that can…