US Income, Payroll and State Taxes
1. US citizens and residents are taxed on global income at graduated federal rates from 10% to 37%, with a 29.6% maximum pass through rate generally applicable to unincorporated qualified business income (due to a 20% deduction thereof). The top rate applies at $751,600 for married filing joint taxpayers (average tax = 27%) and $626,350 for single taxpayers (average rate = 30%). The other principal federal taxes on income are Social Security and Medicare taxes which are 15.3% of income up to $176,100 (2025) with the excess being subject to Medicare tax at up to 3.8% total at higher levels. US Federal income taxes are some of the lowest in the world with an average MFJ tax of only 18% on $250,000 of income.
2. The US Internal Revenue Code (‘the Code’) also contains a federal alternative minimum tax (‘AMT’) at 26/28%, to the extent greater than the regular tax, imposed on regular taxable income with an add back of tax preference items, elimination of the standard deduction, personal allowances, state taxes and certain other itemized deductions, less an exemption which is itself phased out at higher income levels.
3. All but 9 of the 50 US States and the District of Columbia impose state income taxes generally at rates averaging 6% but up to 13% in NY & CA. The principal tax free states are Florida, Tennessee, Texas and Washington. State and local taxes include income, property and sales taxes, which in the aggregate account for 45% of all US tax revenue. Nine States have ‘community property’ rules deeming all income and gains earned during marriage to belong equally to the spouses, with an exception for separate property held prior to marriage or acquired by separate gift or bequest during marriage and not commingled with community assets (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin)
4. A person who is not a US citizen is taxable globally on income as a US resident if he is (1) either a ‘lawful permanent resident’ (‘LPR,’ referred as a ‘green card’ holder) or (2) physically present in the US in the calendar tax year for 183 days computed on a 3 year weighted average ‘substantial presence’ test. Under this test 122 days of presence in the US for each of 3 years would make one a resident in the third year although there are both statutory and treaty dual residence tie breaker rules. There are also various exemptions for student, diplomatic and other non immigrant visa holders, but a 183 day ‘capital gains trap’ may apply to such non residents.
5. Non US residents, referred to in the Code by the unflattering but ubiquitous term ‘non-resident alien’ (‘NRA’), are only subject to US income tax on their effectively connected US business income (‘ECI’) at regular rates and on US source compensation, dividends, royalties, rents, certain interest and other ‘fixed or determinable annual or periodical...income’ (‘FDAPI’) at a Code withholding tax rate of 30% reduced by 67 US income tax treaties to 0% to 15%.
2. The US Internal Revenue Code (‘the Code’) also contains a federal alternative minimum tax (‘AMT’) at 26/28%, to the extent greater than the regular tax, imposed on regular taxable income with an add back of tax preference items, elimination of the standard deduction, personal allowances, state taxes and certain other itemized deductions, less an exemption which is itself phased out at higher income levels.
3. All but 9 of the 50 US States and the District of Columbia impose state income taxes generally at rates averaging 6% but up to 13% in NY & CA. The principal tax free states are Florida, Tennessee, Texas and Washington. State and local taxes include income, property and sales taxes, which in the aggregate account for 45% of all US tax revenue. Nine States have ‘community property’ rules deeming all income and gains earned during marriage to belong equally to the spouses, with an exception for separate property held prior to marriage or acquired by separate gift or bequest during marriage and not commingled with community assets (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin)
4. A person who is not a US citizen is taxable globally on income as a US resident if he is (1) either a ‘lawful permanent resident’ (‘LPR,’ referred as a ‘green card’ holder) or (2) physically present in the US in the calendar tax year for 183 days computed on a 3 year weighted average ‘substantial presence’ test. Under this test 122 days of presence in the US for each of 3 years would make one a resident in the third year although there are both statutory and treaty dual residence tie breaker rules. There are also various exemptions for student, diplomatic and other non immigrant visa holders, but a 183 day ‘capital gains trap’ may apply to such non residents.
5. Non US residents, referred to in the Code by the unflattering but ubiquitous term ‘non-resident alien’ (‘NRA’), are only subject to US income tax on their effectively connected US business income (‘ECI’) at regular rates and on US source compensation, dividends, royalties, rents, certain interest and other ‘fixed or determinable annual or periodical...income’ (‘FDAPI’) at a Code withholding tax rate of 30% reduced by 67 US income tax treaties to 0% to 15%.
Social Security Taxes (Old Age, Survivor & Disability Income) + Medicare Taxes
Employee Employer Total Social Security & Medicare Tax |
Social Security 6.2% 6.2% 12.4% Base $176,100 $176,100 |
Medicare 1.45% 1.45% 2.9% Base Total Wages Total Wages |
Note: Additional ACA (Obamacare) tax increases effective from 2013:
- 3.8% Medicare Tax on unearned income (imposed on the lesser of AGI in excess of $250,000 or investment income)
- 3.8% Medicare Tax on earned income (no limit) consisting of:
- existing 1.45% employee Medicare tax plus new tax of 0.9% on employees earning more than $200,000 of earned income
- existing 1.45% employer Medicare tax
Above taxes apply to married filing joint taxpayers; for single taxpayers, the thresholds are AGI in excess of $200,000 and employees earning more than $200,000 of earned income.
Self employed individuals pay the employee and employer taxes
Self employed individuals pay the employee and employer taxes