What is

Federal Income Tax


Federal Income Tax is the tax on the money you earn that’s owed to the country you reside in or your home country, depending on residency status. Learn more.

Federal Income Tax is the tax on the money you earn that’s owed to the country you reside in or your home country, depending on your residency status. It applies to individuals, corporations, trusts, and legal entities. Along with wages and salaries, the federal income tax also covers investment income.

What you owe  depends on several factors, such as your income, deductions, and credits. It’s also affected by certain legislation that reduces the tax required for certain taxpayers. Employers typically withhold taxes from employees' paychecks to ensure compliance. In the case of self-employed individuals, they must report and remit their federal income taxes.

Many countries worldwide don’t rely on federal income taxes but use other forms of taxation, such as Value Added Tax (VAT). However, the US and Canada both have a federal income tax system. 

How the US Handles Federal Income Tax

In the US, federal income taxes are collected by the Internal Revenue System (IRS). It’s the country’s largest source of revenue and is used to fund various public programs, such as education, public defense, and infrastructure.

Tax rates for individuals are progressive, which means that the higher your income, the more they increase, ranging from 10 to 37%. The rates depend on specific income thresholds called tax brackets.

Everyone, regardless of location or employment, is subject to federal income taxes. Deductions and credits can reduce tax liability based on specific legislation.

The federal government collects federal income taxes, while state income taxes depend on individual states.

Canada’s Approach 

In Canada, federal income taxes are collected by the Canada Revenue Agency (CRA), which relies on taxpayers to self-report their income through yearly returns. Similar to the US, it's utilized to support essential government initiatives and services.

Also similar to the US, Canada's income tax system is progressive, meaning higher income levels are taxed at higher rates. Tax brackets, like $10,000 - $15,000, determine how much you pay based on your income.

Provinces and territories set their taxes in addition to federal rates. Most people file a single return, except Quebec residents who file two separate returns. Municipalities also collect taxes, but not through your tax returns. Some municipal taxes can be claimed against provincial or federal taxes.

Gross Income vs. Net Income 

When it comes to earnings, workers receive either gross income or net income (NI), also known as take-home pay. Gross income represents the total amount earned before any deductions. On the other hand, net income is what remains after taxes, benefits, and voluntary contributions are deducted from the paycheck. Withheld taxes indicate that the company or payer has already paid the tax to the government on the worker's behalf.