Most working people pay federal income tax, but not everyone

Federal income tax is collected from most people who earn wages, self-employment income, or investment returns above a certain threshold. The threshold depends on your age, filing status, and type of income. If you earn less than that threshold, you may not owe federal income tax at all. If you earn more, you file a tax return and pay based on how much you made and what deductions or credits you may have access to for.

The Internal Revenue Service (IRS) sets the income thresholds each year. For 2024, a single person under 65 does not owe federal income tax if their income is below $14,600. A married couple filing jointly does not owe it if their combined income is below $29,200. These numbers change annually, and they are higher if you are 65 or older. Self-employed people have different rules and typically owe tax on net earnings above $400, regardless of age.

Key Takeaways

  • You must file a federal tax return if your income exceeds the IRS threshold for your filing status, even if no tax is owed.
  • Employees have federal income tax withheld from paychecks by their employer, while self-employed people pay estimated tax quarterly.
  • Not all income counts the same way—wages are taxed differently than capital gains, and some types of income are not taxed at all.
  • The threshold below which you owe no tax changes each year and depends on whether you are under or over 65.
  • Filing a return even when you owe no tax can result in a refund if your employer withheld too much.

How the income threshold works

The IRS publishes a standard deduction each year. If your total income is below that amount, you owe no federal income tax. The standard deduction is not the same for everyone—it depends on your filing status (single, married filing jointly, head of household, or married filing separately) and your age.

For 2024, here are the standard deductions: a single person under 65 has a standard deduction of $14,600; a single person 65 or older has $18,350. A married couple filing jointly, both under 65, has $29,200; if one spouse is 65 or older, it is $30,750; if both are 65 or older, it is $32,300. A head of household filer under 65 has $21,900; at 65 or older, $27,700. These amounts increase slightly each year to account for inflation.

If your income is below your standard deduction, you do not owe federal income tax. You may still want to file a return if you had taxes withheld from your paychecks, because you could receive a refund.

Who must file even if they owe no tax

You must file a federal tax return if your income is above the threshold for your filing status, regardless of whether you actually owe tax. Filing is also required in some situations where your income is below the threshold.

You must file if you are self-employed and your net earnings from self-employment are $400 or more, even if your total income is below the standard deduction. You must also file if you had income from a job and your employer withheld federal income tax from your paychecks—because you may be may have access to to a refund. Additionally, if you received a Form 1099 (for freelance work, investment income, or other non-wage income), you should file to report it, even if the amount is small.

Some people file even when not required because they want to claim a refundable tax credit, such as the Earned Income Tax Credit (EITC) or the Child Tax Credit. These credits can result in a refund even if you owe no tax.

Employees versus self-employed people

Employees have federal income tax withheld from their paychecks by their employer. The employer uses a W-4 form (which you fill out when hired) to calculate how much to withhold based on your income, filing status, and number of dependents. The withheld amount is sent to the IRS throughout the year on your behalf.

Self-employed people do not have an employer withholding tax for them. Instead, they must pay estimated federal income tax quarterly—on April 15, June 15, September 15, and January 15. They calculate their expected income for the year, subtract deductions, and pay one-quarter of the estimated tax each quarter. If they do not pay enough, they may owe a penalty when they file their annual return.

Both employees and self-employed people file an annual tax return. Employees use Form 1040 with a W-2 from their employer. Self-employed people use Form 1040 with a Schedule C (to report business income and expenses) and a Schedule SE (to calculate self-employment tax, which covers Social Security and Medicare).

Types of income that are taxed differently

Not all income is taxed at the same rate. Wages and salaries are taxed as ordinary income. Long-term capital gains (profit from selling an investment you held for more than one year) are taxed at lower rates: 0%, 15%, or 20%, depending on your total income. Short-term capital gains (from selling an investment held one year or less) are taxed as ordinary income.

may have access to dividends from stocks are also taxed at the lower capital gains rates. Interest income from savings accounts, bonds, and CDs is taxed as ordinary income. Rental income is taxed as ordinary income, though you can deduct expenses related to the rental property.

Some types of income are not taxed at all. Municipal bond interest is generally not subject to federal income tax. Gifts and inheritances are not taxed as income to the person receiving them. Certain disability benefits and workers' compensation are not taxed. If you receive a settlement from a lawsuit, the tax treatment depends on what the settlement is for—personal injury settlements are usually not taxed, but settlements for lost wages are.

How tax brackets and rates work

Federal income tax is progressive, meaning the tax rate increases as your income increases. The IRS divides income into brackets, and you pay a different rate on income within each bracket. For 2024, the federal tax brackets for single filers are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

A common mistake is thinking that if you move into a higher tax bracket, all your income is taxed at that rate. That is not how it works. Only the income within each bracket is taxed at that bracket's rate. For example, a single person in 2024 pays 10% on income up to $11,600, then 12% on income from $11,601 to $47,150, then 22% on income from $47,151 to $100,525, and so on. Your effective tax rate (the average rate you pay on all your income) is lower than your marginal rate (the rate on your last dollar of income).

Deductions and credits that reduce what you owe

You can reduce your taxable income by claiming deductions. The standard deduction is the simplest option for most people—you subtract it from your total income, and the result is your taxable income. Some people instead itemize deductions, which means listing specific expenses like mortgage interest, state and local taxes, charitable donations, and medical expenses. You itemize only if your total itemized deductions exceed your standard deduction.

Tax credits are different from deductions. A credit reduces your tax dollar-for-dollar, while a deduction reduces your taxable income. A $1,000 credit saves you $1,000 in tax; a $1,000 deduction saves you tax equal to your tax rate (so 22% of $1,000, or $220, if you are in the 22% bracket). Common credits include the Child Tax Credit, the Earned Income Tax Credit, the American Opportunity Credit (for education), and the Saver's Credit (for retirement savings).

Frequently Asked Questions

Do I have to file a tax return if I made less than the standard deduction?

Not if that is your only income and you had no taxes withheld. However, you should file if your employer withheld federal income tax from your paychecks, because you may be may have access to to a refund. You should also file if you are self-employed and your net earnings are $400 or more, or if you want to claim a refundable tax credit.

What happens if I do not file when I am supposed to?

The IRS can assess a failure-to-file penalty if you owe tax and do not file by the important date. The penalty is usually 5% of the unpaid tax per month, up to 25%. If you do not owe tax, there is no penalty, but you may miss out on a refund if you had taxes withheld. The IRS typically holds refunds for three years before they are forfeited.

Can I change how much tax is withheld from my paycheck?

Yes. You fill out a new W-4 form and give it to your employer's payroll department. You can increase or decrease the amount withheld by changing your filing status, number of dependents, or other income on the form. If you expect to owe tax, you can have extra withheld; if you expect a large refund, you can have less withheld.

Is Social Security taxed as federal income?

Social Security benefits may be taxed, depending on your total income. If you are single and your combined income (adjusted gross income plus half your Social Security benefits) exceeds $25,000, up to 50% of your benefits may be taxable. If it exceeds $34,000, up to 85% may be taxable. For married couples filing jointly, the thresholds are $32,000 and $44,000.

What if I owe more tax than I can pay?

Contact the IRS. You can set up a payment plan (installment agreement) to pay over time, or you can request an offer in compromise if you cannot pay the full amount. The IRS also has hardship programs for people facing financial difficulty. Filing your return on time, even if you cannot pay, reduces penalties.