Taxes 101 - The Starter Pack
Beginner’s Guide to Federal & State Taxes
Taxes are one of those things you’ll deal with every single year as an adult but almost nobody explains them well in school if at all. If you’re between 16 and 30, you may be starting your first job, earning side hustle income, or just wondering why a chunk of your paycheck disappears before it hits your bank account.
This guide breaks down the basics of taxes, so you actually understand what’s happening.
What Are Taxes?
Taxes are money collected by the government to pay for things we all use. Imagine a community pool of money that funds:
Roads, bridges, and public transit
Schools and teachers
Police, firefighters, and EMTs
The military and national defense
Social programs like Medicare and Social Security
Without taxes, these systems wouldn’t exist. Everyone contributes a piece of their earnings, and the government uses it to keep the country and your state running.
Who Collects Taxes?
There are two main levels of income tax in the U.S.:
1. Federal Taxes (National)
Collected by the IRS (Internal Revenue Service).
Everyone in the country pays this if they earn money above a certain amount.
Rates are based on tax brackets which means your income is taxed in sections, not all at one rate.
2. State Taxes (Local)
Collected by your state government.
Rules and rates vary by state.
Some states, like Texas and Florida, don’t charge income tax at all.
Most people pay both federal and state taxes.
How Are Taxes Taken From Your Money?
1. Paycheck Withholding (Most Common)
When you get a job, you fill out a W-4 form. This tells your employer how much to take out of each paycheck for taxes. Your employer sends that money straight to the government for you.
Example: If you make $3,000 in a month, your employer might withhold $400–$500 for federal and state taxes.
You’ll only see about $2,500 hit your bank account.
2. Quarterly Payments (For Freelancers or Side Hustlers)
If you’re self-employed (running a side business, freelancing, gig work like DoorDash, etc.), no one withholds taxes for you. You’re responsible for sending tax payments to the IRS every three months.
3. Annual Filing (Tax Return)
Each year, usually by April 15, you file a tax return. This is where you add up what you earned, what was withheld, and any credits or deductions you qualify for.
If you paid too much during the year → you get a refund.
If you didn’t pay enough → you owe money.
What Do Federal & State Taxes Pay For?
Federal Taxes:
Social Security (retirement income for older Americans)
Medicare & Medicaid (health care programs)
Defense and military spending
Federal programs (student aid, food assistance, disaster relief)
State Taxes:
Public schools and universities
Local health care programs
Roads, highways, and public transportation
Police, fire, and safety services
Common Misunderstandings
“All my income is taxed at one rate.”
Nope, that’s not how it works. Tax brackets mean the first part of your income is taxed at a low rate, and higher portions at higher rates. (More on this in our Tax Brackets article.)
“A tax refund is free money"
Wrong. It just means you overpaid throughout the year, and the IRS is giving your own money back.
“I don’t earn enough to worry about taxes.”
Even if you don’t owe much, you often still need to file. Plus, filing can unlock refunds and credits (like the Earned Income Tax Credit).
Why Filing Matters (Even If You Think You Don’t Owe)
You may qualify for refunds or tax credits you’d miss otherwise.
Filing builds your official financial record.
Avoids IRS penalties or issues later.
Taxes are simply a system of sharing money to fund the services we all use. Once you understand the basics federal vs. state, withholding, and annual filing, the process becomes a lot less mysterious and a lot more manageable.
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