Federal income tax is the most common type of tax, and it applies to all “earned income.” (That means any income you received in exchange for performing a job.)

You may have heard the US tax system described as “progressive” or “graduated.” Here’s what that means.

The easiest way to understand the progressive tax system is to consider income in buckets. The first bucket of income is taxed at 10%, the second at 12%, the third at 22%, and so on.

For example, let’s say you have gross wages of $50,000. The first $10,275 is taxed at 10%, the next $31,500 is taxed at 12%, and the remainder of your salary ($8,225) is taxed at 22%. Your total tax liability would be broken down like this:

These buckets are called “tax brackets.” The idea is to treat everyone equally while still requiring higher taxes from higher earners.

For instance, the first $10,275 that Jeff Bezos makes is taxed at 10%, just like everyone else. The only chunk of his income taxed at the highest rate (37%) is the income above half a million dollars.

You may have heard the terms “marginal” and “effective” tax rates thrown around. Your marginal tax rate refers to the highest tax bracket your income is exposed to. So using the example above, where you made $50,000, your marginal tax rate would be 22%.

But we’ve learned that most of your income isn’t taxed at 22%. So the effective tax rate describes the average rate you pay. Using the example above, your effective tax rate would be 14%. That’s the average of 10, 12, and 22: 10 + 12 + 22) / 3 = 14.

The income tax brackets for 2021-2022, by filing status‍

Now that you have the basics, there’s another complicating factor: filing statuses.

The tax brackets are determined according to your filing status: single, married filing jointly (MFJ), married filing separately (MFS), and head of household (HoH). See the table below:

Self-employment taxes are a combination of Social Security and Medicare dues (often referred to as FICA).

For W-2 employees, these are automatically calculated and withheld from their paychecks and reported on their W-2. Consequently, they rarely deal with these taxes when they file their annual 1040 — they’ve already been squared up during the year.

On the other hand, self-employed folks don’t have it so easy. They must calculate and remit their Social Security and Medicare taxes when filing to 15.3%. To learn more about why this rate is so high, check out our guide to self-employment taxes.

If you have freelance income or a side hustle, business write-offs are the only way to lower your self-employment taxes directly. The simple definition of a write-off is any work-related cost that’s ordinary in your industry and necessary for completing the job.

Often, people hesitate to claim business write-offs because they picture conventional things like computers, software, and supplies that might not apply to them. But what’s traditional in one industry might not be standard in another.

A pet groomer, for instance, probably doesn’t need a postage scale, but they do need shears, pet shampoo, and treats. Similarly, a freelance photographer doesn’t need pet shampoo but might need ring lights, props, and multiple camera lenses.

Don’t miss out on write-offs because you’ve boxed yourself in. You know what you need to get the job done, so write off those costs! And if you need some inspiration, check out our freelance tax deductions tool, which lists common write-offs for more than 25 jobs, from real estate agents to bloggers.

Income adjustments happen before anything else is calculated on your return, allowing you to reduce the income subject to tax. The most common income adjustments include:

Education expenses (up to $250)

Retirement contributions

HSA contributions

Self-employed health insurance

Student loan interest

Alimony after a divorce

The deductible part of self-employment tax

Every taxpayer has two options: the standard deduction or the itemized deduction. Whichever option you claim, your deduction is included on top of your business write-offs.

The goal of the standard deduction is to shield a base amount of income from taxation. It’s supposed to be routinely adjusted for the cost of living but is seldom on the mark.

The standard deduction is granted automatically based on your filing status:

Credits lower your tax bill dollar for dollar. If you’re eligible to claim one, savor it. There are two types of credits: refundable and nonrefundable.

Refundable tax credits could be paid out to you as a refund even if you withheld nothing during the year.

For example, if you have a $1,000 credit, and your tax bill is only $200, the remaining $800 gets issued as a refund.

Examples of common refundable credits include:

💰 Earned Income Credit: This credit is available to taxpayers with earned income and whose total income doesn’t exceed certain limits: $1,502-6,728

🍼 Child Tax Credit: Expanded with the American Rescue Plan (ARP), the CTC ranges from $3,000-3,600 and is available for taxpayers with children under age 17. For 2022, these rates may return to the pre-ARP amounts: $2,000 per child under the age of 16.

🎒 American Opportunity Credit: Students are eligible to claim $2,500 annually during the first four years of post-secondary school. However, only 40% of the credit is eligible for refund, with a max allowable refund of $1,000.

🏥 Premium Tax Credit: This credit is available to low-income taxpayers who purchase their health insurance through the Marketplace, and is usually distributed throughout the year to offset the cost of health insurance.

👶 Child and Dependent Care Credit (2021 only): Expanded under the American Rescue Plan, this credit is refundable for 2021 only. It accounts for child-care expenses while the parent is working or looking for work. The max credit is $4,000 per qualifying child.

While you can’t cash these credits, they still pack a punch at tax time. As mentioned earlier, credits reduce your tax bill dollar for dollar, essentially working like tax withholdings. Common examples include:

🏦 Saver’s Credit: Available to any taxpayers who make retirement contributions and whose income doesn’t exceed certain limits. The max credit available is $1,000.

📚 Lifetime Learning Credit: Covers 20% of your education expenses up to $10,000, with a max credit of $2,000.

👪 Adoption Credit: Available to taxpayers pursuing adoption, with a max benefit per adoptive child of $14,440. Even though this credit is nonrefundable, it can be carried forward for up to 5 years and applied to future tax liabilities.

👶 Child and dependent care credit (2022 onward): Unless the 2021 changes get extended by congress, the dependent care credit will return to a max of $1,050 per child and will no longer be refundable.

🌍 Foreign tax credit: This credit is available for taxpayers who pay tax on foreign income.

How to stay on top of your tax bill

Because freelancers and gig workers don’t have an employer withholding their taxes for them, the IRS made it possible for taxpayers to make “estimated tax payments” throughout the year. Aren’t we lucky?

Estimated tax payments are a way to "pay as you go" during the year. If you have a good set of records to work with, you can use your actual figures for the quarter and plug them into a quarterly tax calculator to figure out what your next payment should be.

Estimated tax payments are due the 15th day following the end of the quarter, so the payment schedule looks like this:

1st quarter (Jan-Mar): Due April 15th

2nd quarter (Apr-Jun): Due July 15th

3rd quarter (Jul-Sep): Due October 15th

4th quarter (Oct-Dec): Due January 15th

Generally, you're off the hook for these if you expect to owe less than $1,000. For everyone else, keep reading.

Estimated tax payments aim to avoid getting hit with an underpayment penalty. Underpayment penalties range from 3-5% of your tax due and are subject to interest and the rest of your unpaid bill. This penalty is avoidable if:

You withheld at least 90% of the current tax-due amount or 100% of the prior year's tax-due amount.

If neither applies to you and you expect to owe more than $1,000, you should make estimated tax payments.