Non-USian here. How does federal income tax work for people with a normal, regular job? If someone just works full time in a shop or on a factory line, do they get yearly tax demand that they have to check and/or calculate themself?
The problem that makes things a lot more complicated is that the US has many little mechanisms for reducing your tax liability that are very tempting to use (and oftentimes inevitable): 401k, HSAs, mortgage interest deduction, 529 accounts, long term capital gains, capital loss offsets etc. HN readers tend to be more educated than average and have a higher income than average. Also, a lot of math-inclined, optimizer types here who will absolutely want to take advantage of these features in the tax code.
When you start adding every little way to pay less taxes, or start doing more interesting things in your life such as setting up a small business or buying property, tax preparation can become a nightmare.
That's way too complicated. In the UK, for the vast vast majority of people, there are no forms. if you meet the criteria in this quiz [0] (self employed top 5% of earners, or other large incomes), you get a pre-filled-in form that you enter extra numbers into. For the vast vast majority of people, you never see this form, and most people who fill in this form just click through it.
Don't get me wrong, it would be a lot better to not do it like you describe, but as far as bureaucracy is concerned, I'll take this over all the other bureaucracy you have to deal with in Europe. It's the one time in the year that I feel I have to actively deal with the government in the US, at least in the state I live.
I'm a bit surprised to hear this - what do you mean here? My experience is that bureaucracy is rife in the US.
All I'm saying is that the current system isn't that difficult for most scenarios, simply annoying busy work and form filling that should be done automatically by the government. When people talk about the US system, it sounds like most people would need a tax professional for doing taxes when that's not really the case.
https://www.propublica.org/article/inside-turbotax-20-year-f...
Later, at the end of the year, you file your return of what you actually made, what your actual deductions were, etc. And then the government will either pay you if you paid too much or they will ask you to pay if you did not pay enough.
The system here in the UK is similar, except that "regular workers" don't file a tax return. Work-related deductions/additions (e.g. private health plans) are reported by the employer and are automatically accounted for. Non-work stuff like capital gains on personal property sales are mostly dealt with as part of the transaction.
The reason you might have heard a lot of fuss around hiring more IRS agents, is that the only way to validate these numbers if to be audited (broadly speaking). There might be some automated checks for very obvious things but much of the process is self-reported.
The software is largely there to help people with the math and accounting for all of the deductions that the average person may be eligible for (mortgage interest being the largest and most common).
The software is not necessarily "required" you could fill out all of these forms by hand and the IRS also provides online software to aide in filling some of the forms. Many people do do this if they have very simple tax situations and they don't mind dedicating some time to it.
However, due to the complexity of the filing it often is just easier to pay turbotax, HR block, etc to ask some questions and auto-populate the forms for you.
There is also weirdly specific forms you sometimes need for certain deductions/situations (foreign income, foreign bank accounts, investments, crypto, living on a college campus, school supply tax reductions, etc) and its not always obvious when you need to fill these forms out, you could read the IRS website but that's excruciating. So often times these tax softwares also ask questions to help you determine what forms are necessary to have a complete return or help you maximize your deductions by finding the ones you qualify for.
Wrong. I did my first tax return by manually filling out the PDF form. Even though I only had a single income and was filing the EZ form, it took at least an hour or two. Then there were state taxes.
Correct. Part of the tax prep scam is convincing people that they will get the death penalty if they screw up their taxes, so they need an accountant or all these fancy software gizmos to do it right. If you can use a calculator, and aren't a SBO or have a massively complicated investment scheme, then you can do your own taxes in an hour or two. The IRS will send you a polite letter letting you know if you screwed up.
So the employee's task is to present a record to the government (known as "Filing Taxes") that says: I earned this much, and I already paid this much tax, so you owe me this much back (while it's possible to have paid too little tax, most people pay too much for fear of ending up in trouble -- you're required to pay some high proportion of taxes owed for the year, during the year -- like pay-as-you-earn).
Employers send each employee a piece of paper at the end of the year showing how much they earned and how much tax was already sent to the government. For the simpler case, generating the tax filing (form 1099EZ) is pretty much a case of copying numbers from the W-2 onto the 1099. Most people would also need to add some numbers that come from other places (e.g. mortgage interest paid, tax credit for buying an EV) but those are also available as pieces of paper sent to you by lenders etc. Since math has to be done to determine the owed tax and subtract the already paid tax, a paper form is not the right way to do it. A spreadsheet is ok for the math, then copy the numbers onto the paper form. But that's some work. Hence "Tax prep software" which is basically a combination of the spreadsheet and a fillable PDF.
Since the government is slow, they never developed that spreadsheet+pdf web site early on, allowing commercial entities (Intuit, mostly) to jump in as an intermediary.
Although the US tax system can be complex, as you suspect for most people it really isn't. The issue here is more about the government pretending they don't have the information necessary to generate a person's tax filing for them. This puts the burden on the user, and so in turn they get help with that from companies like Intuit. Eventually it becomes obvious this situation is ridiculous, but putting the genie back in the bottle is not so easy.
The government gets a copy of your W-2 and 1099s.
The forms used to calculate this are quite complicated because they are designed to be very versatile. For instance, in years gone by you could reduce your taxable income by noting stuff like healthcare expenses, childcare expenses, home mortgage interest etc. This is all now covered (for most people) by a standard income exemption that everyone gets.
The forms have not been simplified to match.