As in the case of any system, the US taxation system also follows some general rules. As a common man, if you go through these rules one by one, you will be able to appreciate the taxation system and find it easier to understand. There is a general perception that the taxation system is too complicated, comprising of several levels of taxes, Federal, State and Local level. We are discussing ten basic rules here, the ones that have to be kept in mind. This would help you understand US taxation much better.
Ten Rules Of Taxation
1. All compensation for services performed in the US in the form of salary, wages, profit etc., is subject to US taxes unless an exception applies. As an old saying goes “There are only two things that are certain: death and taxes”. Thus, no matter what your job or business is, you will have to pay the government its share from your earnings in the form of taxes.
2. How much and on what basis is an individual taxed in the US, depends upon how you are performing or your US status: resident or non-resident.
3. An immigrant has to pay US taxes on worldwide income, just like an US citizen, even if the individual works or resides abroad. This is unless an exemption applies in this case.
4. If you are a US citizen and are working and residing abroad, you still have to pay taxes on your worldwide income. This is regardless of the country or currency or location of payment. If your income is effectively connected to a US trade or business, you will have to pay income tax no matter what the source is.
5. In some countries, you might have to pay taxes on the income that you are earning in that country. This way you pay double taxes. To eliminate this double taxation, the US has signed Tax Treaties with over 60 countries. If you are in a country where the treaty is not applicable, you can claim your tax returns for double taxation every year when you fill your return forms. But this is done as a tax return; initially, you will have to pay the taxes.
6. The United States collects taxes on the income of non residents by withholding income at source. The US withholds taxes by 30 percent, unless an exception applies.
7. The responsibility of an employer is to withhold Federal and state income taxes, social security as well as Medicare taxes. This is done as a percentage of the compensation paid for employment services performed in the US. This rule is for both US as well as foreign employers.
8. All the payments that are made by the employer to the employee, in form of cash, fair market value of benefits and perks, are wages subject to withholding taxes.
9. To avail any exemption or when an individual meets the conditions for an exception, an individual has to document the exception by submitting a completed form, duly signed by right authorities, to the payer or to the IRS. Failing to do this means that the exception would not apply.
10. If the tax payer fails to withhold or collect the necessary form for the exemption from withholding, the IRS has the right to enforce withholding by collecting penalty and interest in addition to the taxes.