
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
Jennifer Agee has been editing financial education since 2001, including publications focused on technical analysis, stock and options trading, investing, and personal finance.

âTaxes,â according to Oliver Wendell Holmes, Jr., âare what we pay for civilized society.â Whether you believe weâre getting our moneyâs worthâor whether we live in a civilized society at allâitâs no stretch to say we pay a lot of taxes, and a lot of different types of taxes.
Some tax rates are higher depending on your socioeconomic level; some are assessed at the same rate for everyone. Some are inescapable; some are due only if you buy or use the good or service being taxed. Some have clever names meant to imply that theyâre not taxes, but they certainly act like taxes.
Hereâs an overview of the taxes we pay. No charge.
Taxes are due on any type of income you may earn:
You pay taxes at the federal level, as well as the state and/or local level depending on where you live. Income taxes are paid on a progressive tax system, which means that the more income you make, the higher percentage of tax you pay. Federal taxes pay for services provided to all U.S. citizens, such as interstate highways, federal parks, national defense, and so on.
At the state and local level, youâre taxed on your income where you earn it as well as where you live. If you live and work in different states, your states may have a system that reduces taxes where you live because you paid taxes where you work. Taxes paid at the state and local level pay for services in that locality, such as roads, school systems, and state parks. There are several states that donât have income tax, which means their services are paid for via other types of taxes.
If you work for a company and receive W-2 income, you pay both FICA Medicare and FICA Social Security taxes out of your paycheck. (FICA stands for the Federal Insurance Contributions Act.)
FICA Medicare tax is paid as a flat 1.45% of all taxable earnings on your paycheck. If you make more than $200,000 (no matter your tax filing status or your marital status), you pay an additional 0.9% in Medicare tax with each paycheck. Deductions for insurance, health savings accounts (HSAs), and flexible spending accounts (FSAs) are all allowed in calculating your taxable earnings.
FICA Social Security tax is paid as a flat 6.2% of all taxable earnings on your paycheck up to $176,100 for the 2025 tax year. Once again, deductions for insurance, HSAs, and FSAs are all allowed in calculating your taxable earnings.
If you are self-employed, you pay for your FICA taxes through self-employment tax. The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. You might notice that these tax rates are double whatâs paid by a person who is employed by a company. Thatâs because when you work for a company, that company pays half of your Social Security and Medicare taxes.
If you work for a companyâthat is, you are not self-employedâyour company pays several taxes on your behalf:
Sales taxes are paid on things you buy. Even if you donât have income, depending on the state and its tax laws, you must pay sales tax when you purchase clothes, food, and other items.
Even if you donât live in the state where youâre making purchases, you must pay sales tax when you buy something there. It is assumed that youâre using local services, such as roads and traffic lights, when you are buying things, so you must pay your share while passing through. (A few states do not have sales tax: Delaware, Montana, New Hampshire, and Oregon. Alaska has none at the state level, though some localities impose one.)
Excise taxes are additional or special taxes that are charged only on specific items. In some cases, governmental authorities are trying to discourage the use of these items by charging an excise tax.
Here are some examples of excise taxes:
Property taxes are annual taxes that are charged by the local government where you own property.
Capital gains taxes. If you sell an investment such as a stock or bond for more than you bought it for, you may own capital gains tax.
Tariffs are taxes tooâjust not the kind you pay directly. Theyâre typically charged on imported goods, raising the price of those items and often influencing trade policy. Although technically paid by importers, the costs are usually passed along to consumers. Learn more about tariffs and how they work.
Taxes on the sale of your home. You may owe taxes on the sale of your primary residence if you have a gain of more than $250,000 or $500,000 if youâre married and filing jointly.
Gift taxes. If you give a gift over a certain amount ($19,000 for the 2025 tax year), you may owe taxes on that gift.
Estate taxes. At the time of your death, the fair market value of your estate (including your home, cash, investments, and so on) reduced by your debts (such as a mortgage) passes to your heirs. The final amount is called your âtaxable estate.â If your taxable estate value exceeds $13,990,000 for the 2025 tax year ($27,980,000 for a married couple), a special tax return will need to be filed on your behalf and estate taxes may be due.
Business taxes. If you own a business, you will pay tax on your business income. This income will be taxed differently depending on the type of business you own, such as an S corporation, sole proprietorship, C corporation, limited liability company, or partnership.
Depending on where you live, you might pay other fees that are really taxesâthat is, they help local governments pay for services they provide to you and your fellow citizens. Some examples include:
We all need to pay taxes in order to get the services we want and need. Everyone feels that they want to pay only their âfair shareâ of taxes. But ask 10 people what a âfair shareâ means, and youâll get at least 10 different answers.
The best practice is to know what taxes you have to pay in the place where you live. If youâre thinking about moving, look at the tax rates of the various states before you make your choice. If you go on vacation, you may wish to consider the extra costs of eating out, particularly if itâs a big city or tourist destination that charges extra taxes in hopes of shifting the burden to out-of-towners.
Also, you can avoid several types of excise taxes by developing healthy habits like not smoking or vaping; eating healthy, store-bought food at home; or cutting down on alcohol consumption.
And if your budget is limited, you may wish to consider buying goods and services in a nearby state, if the sales or restaurant taxes are lower there. Just remember that the extra gas tax to get you to and from that location might be more than the sales tax you save.