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Understand Taxes

 As an employee, self-employed individual, independent contractor, or part of the gig economy, you may have a requirement to file federal and state income tax returns. The federal return is filed with the Internal Revenue Service (IRS), and the state return is filed with the Franchise Tax Board (FTB). Both returns are generally due on April 15. When the due date falls on a weekend or holiday, the deadline to file and pay without penalty is extended to the next business day. Because there are various tax credits that are refundable—which puts money directly in your pockets—you should file the income tax returns to claim this credit, even if you do not have a filing requirement.

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     Key Terms

    Federal income tax: The federal government collects taxes based on the earnings of individuals and businesses, called an income tax. The federal income tax pays for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt.

    FICA (Federal Insurance Contributions Act): A tax deducted from your pay to contribute to Social Security and Medicare; your employer contributes the same amount on your behalf.

    Gig: A single project or task for which a worker is hired to work on demand. Some gigs are a type of short-term job, and some workers pursue gigs as a self-employment option.

    Gross income: Total pay before taxes and other deductions are taken out.

    Income: Money earned or received such as wages or salaries, tips, commissions, contracted pay, government transfer payments, dividends on investments, tax refunds, gifts, and inheritances.

    Income tax: Federal, state, and local taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Includes both personal and business or corporate income taxes. Not all states and localities have income taxes.

    IRS: The Internal Revenue Service (IRS) is a U.S. government agency responsible for the collection of taxes and enforcement of tax laws

    Net income: Amount of money you bring home in your paycheck after taxes and other deductions are taken out; also called take-home pay.

    Payroll tax: Taxes taken from your paycheck, including Social Security and Medicare taxes.

    Property tax: Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.

    Sales tax: A tax on retail products based on a set percentage of the retail price.

    State income tax: Most states and some local municipalities require their residents to pay a personal income tax. Generally, states use one of two methods to determine income tax: the graduated income tax or the flat rate income tax. Both methods first require you to figure your taxable income.

    Tax credit: Reduces the amount of tax you owe.

    Tax deduction: An amount (often a personal or business expense) that reduces income subject to tax.

    Tax refund: Money owed to taxpayers when their total tax payments are greater than the total tax. Refunds are received from the government.

    Withholding ("pay-as-you-earn" taxes): Money that employers withhold from employees’ paychecks. This money is deposited for the government and is credited against the employees' tax liability when they file their returns. Employers withhold money for federal income taxes, Social Security and Medicare taxes, and state and local income taxes in some states and localities.