Income, Tax Liability & Payment
We have compiled the list of
questions below based on inquiries that we
receive. This information is generic in
nature regarding tax policy questions and is
intended
to serve as tax advice. We also cannot
provide up-to-date information on any
Administration or Congressional proposals
that may affect the information shown herein.
Any questions regarding specific tax
situations or for help in filling out your
tax return should be directed to your
attorney, accountant or other tax
professional, or to the Internal
Revenue Service. The IRS will not
comment, though, on the legislative merits of
current tax law, or on pending Congressional
action that may change the tax code. Finally,
we make every effort to make certain that the
information contained here is accurate, but
due to the fluid nature of the legislative
process, changes in tax laws may occur that
are not reflected here at the time of
publication. To the best of our knowledge,
this information is accurate.
I work part time while I go
to school and my employer takes taxes out of
my paycheck? I am not old enough to vote, but
have to pay taxes. Isn't this a form of
taxation without representation?
I think that students should
be exempt from paying taxes. Wouldn't this be
a way of helping children save money for
their education?
Why am I required to pay
taxes on my unemployment compensation
benefits?
Why does the Government
expect me to pay taxes on tips that I
receive? This is not part of my
salary.
 Many young people believe that,
because they are not old enough to vote, they
have no representation in government and,
therefore, should not be required to pay
taxes. The United States Congress is a body
of elected representatives of the people.
Under our representative form of government,
the Congress has the power to enact all laws
(including Federal tax laws). The members of
Congress speak and vote as representatives of
all the people in their State or district,
including those who did not vote.
Taxes are the primary means by which the
Federal Government obtains the money needed
to finance its operations and programs. We
are sure you would agree that it would be
unfair to provide an exemption from tax for
the income of a young person who cannot vote,
while imposing the tax on the same amount
earned by an older person. Under our Federal
income tax laws enacted by Congress, every
citizen or resident of the United States must
file a Federal income tax return. They must
also pay any tax due if his or her gross
income for the tax year exceeds a specified
amount. The law does not excuse anyone from
tax because of age.
^ TOP
Federal income tax laws generally
apply equally to all taxpayers. Under the
law, every citizen or resident of the United
States whose gross income exceeds specified
amounts must file a Federal income tax
return. Excluding a student's earnings from
taxation, while imposing tax on the same
amount earned by others who work full time is
simply not fair. We are sure you would agree
that this presents serious equity problems.
The Congress often attempted in recent years
to lessen, not to increase, the inequities in
our tax system. The Treasury Department
believes that it is best to provide tax
relief through across-the-board reductions
and not by exempting certain types of income
from tax. In addition, there are several
programs aimed at helping to fund college
educations, including buying
^ TOP
Unemployment compensation has been
fully included in income for tax purposes
since the . Prior to the 1986 Act,
unemployment compensation benefits were only
excludible if the taxpayer's adjusted gross
income and benefits exceeded specified
levels. Congress concluded that unemployment
compensation benefits, which essentially are
wage replacement payments, should be treated
for tax purposes in the same manner as wages
or other wage-type payments (such as vacation
pay or sick leave). Thus, repeal of the
prior-law partial exclusion contributes to
more equal treatment of individuals with the
same economic income.
The Treasury Department recognizes that
including unemployment benefits in income can
result in a significant tax liability when
filing the annual return. However,
unemployment benefits are is designed to
provide temporary income between employment.
In some cases, recipients may prefer to have
full payments during the unemployment period
and make up any income taxes when they find
new employment. Nonetheless, as part of
legislation passed in 1994, Congress enacted
a provision allowing unemployment recipients
to voluntarily elect to have income taxes
withheld from their unemployment benefits. In
this way, the recipients can avoid tax
payments with their annual return.
^ TOP
Tips, like all other forms of
compensation for services, such as salary,
are includible and have always been
includible in income and subject to Federal
income tax. Tips are different from regular
salary, however, because while an employer
knows the amount of salary paid to an
employee and can report that amount to the Internal
Revenue Service (IRS), the employer may
not know how much tip income an employee has
received and may, therefore, be unable to
report the amount of tip income to the IRS.
Since 1966, tipped employees have been
required to report the tip income that they
receive to their employer. Reported tip
income is included by the employer on the
employee's W-2 Form. In addition, withholding
with respect to tip income reported to the
employer has been required since 1966.
If a tipped employee reports the full
amount of tip income to the employer, these
rules result in accurate information reports
on the employee's income and withholding at a
rate that reflects that income.
Unfortunately, many taxpayers did not comply
with these rules. In fact, the compliance
rate with respect to tip income was estimated
to be approximately 16 percent, which meant
that many employees were reporting and paying
tax on none or only a small portion of their
tip income. To address this failure to report
tip income, Congress enacted the tip
reporting rules in 1982. These rules require
employers to provide the IRS with information
about their total sales and total tips that
employees have reported.
If the total tips that employees have
reported total at least eight percent of
total sales, then no additional requirements
are imposed. If, however, total tips reported
by employees is less than eight percent of
total sales, the employer must allocate the
difference among its employees. The amount of
tips allocated to each employee is reported
to the employee and to the IRS. Of course,
employees must pay tax only on the tips they
actually receive, and if an employee can
establish that he or she received less in
tips than the employer reports to the IRS,
then the employee would pay tax only on the
smaller amount. Furthermore, the employer is
not permitted to withhold taxes on any amount
other than tips actually reported to the
employer; the employer may not withhold on
the eight percent of tips allocated to the
employee.
^ TOP
|
|
|
I work
part time while I go to school and my
employer takes taxes out of my paycheck? I'm
not old enough to vote, but have to pay
taxes. Isn't this a form of taxation without
representation?