Federal and state income tax — the basics

When you earn money in the United States, you'll owe taxes at two levels: federal income tax to the IRS, and state income tax to your state (if it charges one). Understanding how both work—and the key differences between being an employee and a contractor—is essential to managing your finances and avoiding penalties.

Federal vs. state income tax

Every person who earns income in the United States pays federal income tax. This money goes to the Internal Revenue Service (IRS) and funds federal programs and services. Most states also charge their own income tax, which funds state-level schools, roads, social services, and other programs. However, not every state does.

Nine states have no income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. A few others tax only certain types of income—for example, Washington taxes capital gains for high earners, while New Hampshire taxes only interest and dividend income. If you move to or work in one of these states, you'll pay no state income tax on your wages.

Because state rules differ widely, check your specific state's tax requirements. Most states with income taxes require you to file your state return by the same federal deadline (April 15), but some have later deadlines. You can find your state's tax rules on your state revenue department's website.

Filing deadlines and extensions

Federal income tax returns are due on April 15 each year for the previous calendar year. This deadline has been the same since 1955. If April 15 falls on a weekend or holiday, the deadline shifts to the next business day. You must file your return and pay any taxes owed by this date to avoid penalties and interest.

If you cannot file by April 15, you can request an automatic six-month extension. You request an extension by filing IRS Form 4868 or by selecting the extension option when making a payment online. However, critical: an extension to file is not an extension to pay. If you owe taxes, you must pay them by April 15 regardless of your extension status. Only the deadline to file your actual return moves to October 15.

W-2 employees vs. 1099 contractors

One of the biggest tax differences in America hinges on how you are classified: as a W-2 employee or as a 1099 independent contractor. These two categories have fundamentally different tax responsibilities, and understanding the distinction can save you thousands of dollars.

W-2 employees

If you work as a W-2 employee, your employer withholds taxes automatically from your paycheck before you receive it. This includes federal income tax, state income tax (if your state charges one), and FICA taxes (explained below). Your employer handles all the paperwork and reporting. At the end of the year, your employer gives you a Form W-2, which summarizes your total wages and the taxes withheld. You use this form when you file your annual tax return.

The W-2 system is simpler for you: you receive paychecks that are already reduced by taxes, and your employer is responsible for getting it right. You also typically receive employee benefits like health insurance, retirement plans, and paid time off, though these vary by employer.

1099 contractors

If you work as a 1099 independent contractor, you are self-employed in the eyes of the IRS. Your employer or client does not withhold any taxes from your payment. You receive the full amount and are responsible for calculating and paying all taxes yourself, including federal income tax, state income tax, and the full self-employment tax.

At the end of the year, if you received $600 or more from a client, they send you a 1099-NEC form listing the total paid. You use this to file your taxes. The key difference: no money is held back, so you must set aside money yourself throughout the year to pay when the deadline arrives. Failing to do this often leads to a large, unexpected bill in April.

FICA taxes: Social Security and Medicare

Beyond federal and state income taxes, there is another payroll tax called FICA (Federal Insurance Contributions Act). FICA funds two major programs: Social Security (a retirement and disability program) and Medicare (health insurance for seniors and disabled individuals). Almost all workers pay FICA tax, and it is separate from income tax.

FICA for W-2 employees

As a W-2 employee, you pay 7.65% of your gross wages toward FICA. This breaks down as 6.2% for Social Security (on wages up to $184,500 in 2026) and 1.45% for Medicare (on all wages with no cap). Your employer pays an equal 7.65%, so the total contribution is 15.3%, but you only see your half deducted from your paycheck. Your employer's half is paid directly to the government on your behalf.

FICA is taken automatically and is not optional. It appears as a separate line on your paycheck, often labeled FICA, OASDI (Old-Age, Survivors, and Disability Insurance), or as separate Social Security and Medicare lines. Your Social Security Number (SSN) tracks how much you contribute over your lifetime; these contributions determine your eligibility for benefits when you retire, become disabled, or pass away.

FICA for 1099 contractors

As a 1099 contractor, you pay the full 15.3% yourself. This is called self-employment tax. Because you are self-employed, there is no employer to split the cost with, so you owe both the employee and employer portions combined. This is often the biggest financial surprise for people switching from W-2 to 1099 work.

On $100,000 of income, a 1099 worker pays roughly $7,065 more in FICA and self-employment taxes than a W-2 employee earning the same amount. This is because the employee portion alone ($7,650) is matched by the employer on a W-2, but a 1099 contractor pays both halves and has no employer match.

Quarterly estimated tax payments for contractors and self-employed workers

The IRS uses a pay-as-you-go system: taxes are due throughout the year, not just in April. As a W-2 employee, this happens automatically through paycheck withholding. As a 1099 contractor or self-employed person, you must make quarterly estimated tax payments yourself.

You must make estimated quarterly tax payments if you expect to owe $1,000 or more in federal taxes for the year. These payments cover both income tax and the full 15.3% self-employment tax. The payments are due four times per year, on approximately April 15, June 15, September 15, and January 15 of the following year.

To calculate your quarterly payment, estimate your total annual income, subtract business expenses (if applicable), calculate your total federal and state income tax plus self-employment tax, and divide by four. The IRS provides Form 1040-ES, a worksheet to help you make this calculation. You can pay online through the IRS website, by phone, or by mail.

If you don't make these payments or underpay, the IRS will assess a penalty even if you ultimately owe a refund when you file your full return. Conversely, if your income fluctuates during the year, you can adjust your quarterly payments upward or downward as needed—just recalculate using Form 1040-ES for the next quarter.

Which classification applies to you?

The IRS uses three factors to determine whether someone is an employee (W-2) or an independent contractor (1099): behavioral control (does the company direct how and when work is done?), financial control (does the company control how you're paid, or can you work for other clients?), and the nature of the relationship (is there a contract, benefits, and permanence, or is it short-term and project-based?).

Some employers misclassify workers as contractors to avoid paying taxes and benefits. If this happens to you, you can report it to the Department of Labor or the IRS. Misclassification can expose an employer to substantial penalties, back taxes, and interest.

Key takeaways

• You owe federal income tax to the IRS and state income tax to your state (unless you live in one of the nine no-income-tax states).
• File your federal return by April 15 each year. An extension moves the filing deadline to October 15, but you must still pay taxes owed by April 15.
• W-2 employees have taxes withheld automatically; contractors must set money aside and pay on their own.
• FICA taxes (Social Security and Medicare) equal 7.65% for W-2 employees (with employer matching) and 15.3% for contractors (self-employment tax).
• If you're a contractor or self-employed, make estimated quarterly tax payments by April 15, June 15, September 15, and January 15 to avoid penalties.
• Contractors can deduct legitimate business expenses from their taxable income, reducing their overall tax burden.
• Track your income, expenses, and tax payments carefully throughout the year, especially if you have multiple income sources or change jobs mid-year.