Common US Tax System Terms Defined
International recruitment companies that are looking to expand operations into the US should work with a qualified accountant or tax professional who can help you navigate the complex US tax system. You may also consider finding reputable legal and compliance experts to lean on throughout the expansion process.
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A basic understanding of the US tax system is beneficial for international recruiters who are hiring in the US. The complex US tax system can feel overwhelming for those who are unfamiliar with it, but knowing common terms may help when it comes to asking professionals the right questions.
Overview of the US tax system
The US tax system is composed of federal, state, and local taxes. Federal taxes include income taxes, payroll taxes (Social Security and Medicare taxes), and excise taxes. Much of what adds to the complexity of the US tax system is the differences that occur from state-to-state. State and local taxes vary depending on the location.
US workers are required to file an annual tax return with the Internal Revenue Service (IRS), the federal agency responsible for collecting taxes in the US. The tax return reports the individual’s income, deductions, and tax liability for the year. Employers are required to withhold taxes from employees’ paychecks and remit them to the government on their behalf.
Common US tax system terms
IRS (Internal Revenue Service): The federal agency responsible for collecting taxes and enforcing tax laws
Tax Identification Number (TIN): A TIN is a unique identification number used by the IRS to identify businesses and individuals for tax purposes, issued either by the Social Security Administration (SSA) or by the IRS
Tax withholding: The amount of money that an employer withholds from an employee’s paycheck to cover their tax liability
Tax deduction: An expense that can be subtracted from taxable income to reduce the amount of income subject to tax
Social Security tax: A payroll tax that funds the Social Security program, which provides retirement and disability benefits to eligible individuals
Medicare tax: A payroll tax that funds the Medicare program, which provides healthcare benefits to eligible individuals
Self-employment tax: The tax that self-employed individuals are required to pay to cover Social Security and Medicare taxes
The Federal Unemployment Tax Act (FUTA): A US federal law that imposes a federal employer tax used to help fund state unemployment insurance programs
The State Unemployment Tax Act (SUTA): A state-level tax that employers must pay (and in some states, employees also contribute) to fund state unemployment insurance programs
W4 form: Also known as an Employee’s Withholding Allowance Certificate, is a form used by US employees that informs their employers of their tax filing status, such as deductions or credits they are eligible to claim
W2 form: A Tax form used in the United States to report wages paid to employees and the taxes withheld from them
W-9 form: Also known as a Request for Taxpayer Identification Number and Certification, is a form used in the US by independent contractors to provide their TIN and certification to the company that will be paying them
1099 Form: This is a tax form used to report payments made to independent contractors, including non-employee compensation
Form W-8BEN-E: A tax form used by foreign entities to establish their foreign status and claim beneficial tax treatment under US tax laws
Disclaimer: This post is provided for informational purposes and should not be considered legal advice, the final word on this topic or a political opinion.