All About Taxes – How system works
The USA income tax was made a permanent fixture in the U.S. tax system in 1913. Since that year, each person working in the United States, resident or non resident, has been required to pay their income tax.
There are four types of income tax in the USA:
- Federal income tax
- State income tax
- Local income tax
- FICA (Federal Insurance Contribution Act) – Social Security & Medicare
- Federal Income Tax – is a tax based on the whole USA territory level. The agency in charge of collecting this tax is called the IRS (Internal Revenue Service). Federal tax rate is 10 to 12% off the earnings. The estimated time to get a federal tax refund is between 8 and 16 weeks. All Work and Travel participants are required to pay this tax.
- State Income Tax–is a tax based on a state level and it is different for each of the states. This tax rate is between 3 and 6%. Each state has its State Department of Revenue which is in charge of collecting this tax, and each state makes independent decisions about the amount of the tax refund and the deadline for the tax refund process. The estimated time to get a state tax refund is between 8 and 16 weeks. There are nine states with no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. All Work and Travel participants are required to pay this tax, except for those working in the aforementioned states.
- Local Income Tax – is a tax which depends on the location of your work place. There are very few of them, but in those places, it must be paid by all employees. The tax rate is very low, often less than 1%. Local income tax refund is connected with the state income tax refund. However, not all the states do the refund of the local income tax.
- FICA (Social Security and Medicare) taxes – represent pension and health insurance. FICA tax rate is 15.3% off the earnings. By law, the employer must pay 50% of this tax, while the other half is to be paid by the employee. The total sum that an employee has to pay is 7.65% (6.2% for Social Security Tax and 1.45% for Medicare Tax) off the earnings. However, if you have a J (exchange visitor), M (student) or F (student) non-immigrant visa, you are not obliged to pay these taxes.If an employer makes a mistake and starts withholding FICA taxes from J, M, or F program participants, this problem can be solved in two ways:
- The easiest way is to inform the employer about your USA non-immigrant status and your type of visa as soon as you notice this irregularity, so that they can give you the refund on your next pay check. You can do this by referring to the IRS publication 519, chapter 8, page 45, where it is clearly stated that, as J, M or F visa program participants, you are not obliged to pay these taxes.
- If by any chance you fail to get the refund from your employer, you can always contact the tax collecting authorities in the USA to get the refund in question. The process of getting the FICA tax refund can last up to one year.
At the end of a fiscal year, employers are bound by law to give their employees the W-2 Form which contains information about the yearly earnings and paid taxes. This form is the most important one for getting a tax refund. The number of W-2 forms should be equal to the number of jobs one had in the USA. Employers are legally obliged to postmark and send the W-2 forms to their employees not later than January 31 of the following year by regular mail.
In order to make sure that the employer sends the W-2 form to the right address, it is of utmost importance to correctly fill out the W-4 form when being hired. The address listed in this form is the address to which W-2 form is going to be sent.
If, at the end of the year, you do not get the W-2 form, you can claim your taxes by filing your last pay slip. Pay slip is a part of a pay check which remains in your possession after cashing the check. The final pay check, i.e. pay slip, contains the same information as the W-2 form, which is why it is important to save the final pay slips from all of your employers.
Important: Pay slips are not documents intended for filling a tax return, and filing them instead of your W-2 form can cause complications and extend the whole refund process.
The documents required for the tax refund:
Important: It is extremely important to file the information about all your USA employers.
If you had a J, M, or F visa and your employer withhold FICA taxes from your paycheck(s) by mistake, you need to enclose the following documents, as well:
All the required documentation along with the instructions can be downloaded from the necessary documentation page.
There are two ways of getting your taxes back:
- By check sent to your home address. Average waiting period is 8 to 16 weeks.
- By direct deposit to your USA bank account. Average waiting period is 8 to 12 weeks.
If you have any further questions related to the USA taxes, feel free to contact us and we will reply as soon as possible.