What Taxes Really Are
Module: Tax Essentials • Lesson 1
Taxes are money you are required to pay to the government
Taxes are payments collected by governments to fund public services and operations.
When you earn money, buy goods, or own certain assets, a portion of your money goes to federal, state, or local governments.
Taxes are not optional. They are a legal requirement tied to income and spending.
WARNING: Failing to pay required taxes can result in penalties, fines, or legal consequences.
Why taxes exist
Taxes pay for services that benefit society as a whole. Even if you do not directly use everything funded by taxes, they support systems that allow the country to function.
Tax money helps pay for:
Schools and education
Roads and highways
Hospitals and healthcare programs
Emergency services (police, fire, rescue)
Public transportation
National defense
Public libraries and parks
Government programs and infrastructure
Taxes are how governments operate and provide public resources.
The main types of taxes you will encounter
Income tax
Taken from money you earn
This is taken from money you earn from jobs or other sources.
Income tax is split into:
Federal income tax
Goes to the US government. This funds military, Social Security, and national programs.
State income tax
Goes to your state government. Not all states charge income tax.
Local income tax
Some cities or counties also tax income. This is less common.
Example:
If you earn $1,000 at a job, federal and state taxes might take $150 before you get your paycheck. You would receive about $850.
Sales tax
Added when you buy things
This is a percentage added to purchases when you buy goods or services.
How sales tax works:
Sales tax is collected at the time of purchase
The store adds the tax to your total
The rate depends on your state and city
Common rates range from 5% to 10%
Essential items like groceries may be tax-exempt in some states
Example:
You buy a shirt for $20. If sales tax is 8%, the store adds $1.60. Your total is $21.60.
Property tax
Paid by property owners
This is paid by people who own homes or land.
Property tax details:
Based on the value of the property
Collected by local governments (cities and counties)
Funds schools, fire departments, and local infrastructure
Homeowners pay this yearly or through monthly mortgage payments
Renters do not pay property tax directly (landlords pay it)
As a teen, you likely will not pay property tax yet. But if you rent or own property in the future, this will be part of your housing costs.
Payroll taxes
Social Security and Medicare
These are automatically taken from your paycheck to fund Social Security and Medicare.
What payroll taxes fund:
Social Security
Provides retirement income and disability benefits. You contribute now and receive benefits later in life.
Medicare
Health insurance for people over 65 and those with certain disabilities.
Everyone who earns wages pays into Social Security and Medicare. These taxes appear on every paycheck as FICA (Federal Insurance Contributions Act) deductions.
Who is required to pay taxes?
Anyone who earns income
This includes jobs, freelance work, side hustles, tips, and investment earnings.
Anyone who buys taxable goods
When you purchase items, sales tax applies in most places.
Property owners
People who own homes or land pay property taxes to local governments.
Businesses
Companies pay taxes on profits and other business activities.
Federal vs state vs local taxes
Federal
Goes to the US government
• National defense
• Social Security
• Medicare
• Federal programs
State
Goes to your state
• State highways
• State universities
• State police
• State parks
Local
Goes to city or county
• Local schools
• Fire departments
• Public libraries
• City services
Key vocabulary
Federal tax
Tax paid to the US government
State tax
Tax paid to your state government
Sales tax
Tax added to purchases at the time of sale
Property tax
Tax paid by homeowners based on property value
Payroll tax
Tax taken from paychecks for Social Security and Medicare
FICA
Federal Insurance Contributions Act - Social Security and Medicare taxes
Quick recap
Taxes are required payments to fund government services
Income tax is taken from money you earn
Sales tax is added when you buy things
Property tax is paid by homeowners
Payroll taxes fund Social Security and Medicare
Federal, state, and local governments all collect taxes
Taxes pay for schools, roads, healthcare, and public services
Everyone who earns income must pay taxes
Quick Check
1. What are taxes?
2. What is sales tax?
3. What do payroll taxes fund?
Next Lesson
Understanding Your Paycheck →