I am not a CPA, this is not Tax advice. This is tax education.

Welcome to another article in the Financial Education Series. This article will cover some basics regarding how Taxes work, which is a vital component for understanding Budgeting, Finance, and Investing. So we’re going to keep this relatively simple and add a few new terms to our Glossary page.

A few weeks back I did a deep dive on what an employee costs an employer, this equates to around 30% more than what the employee’s wages cost. You don’t need to read that right now, but it is relevant to the first taxes that most people see come out of their paycheck.

The key is to understand the “three basic tax types”:

• Taxes on what you Earn (income)
• Taxes on what you Buy (sales, or excise)
• Taxes on what you Own (property)

Starting with income, specifically wages, FICA, or Federal Insurance Contributions Act, is the label used for the portion of your income that pays into Social Security and Medicare. It accounts for 7.65% of your wage income. 6.2% pays into Social Security, and 1.45% pays into Medicare. We can dive into these later but only Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow contributions to come out of your paycheck before FICA taxes.

*We’ll run numbers based on a Single Filer making $50,000 a year at the bottom.*

Next come Income taxes. You’ve heard of tax brackets but we need to re-frame our thinking as tax-buckets. These are filled one at a time, not a blanket tax on everything you make. Evergreen Small Business has probably the best post on the internet about this: [Article]. The basics are this, if you make $15,000 or $15,000,000 your first $11,925 as a single person are still taxed at the same 10%. Then the next bracket taxes the next window of income, etc.

Most State Income taxes work a similar way with ‘buckets’. Many local or city income taxes will tax you off of your full income amount, but that is too local of a thing to cover here.

Once all of those taxes are applied to you, you end up with your take home pay. (obviously there may be medical or other deductions coming out of your pay, but not related to taxes). We are not done with income related taxes though. Investments and Interest from bank accounts like High Yield Savings Accounts (HYSAs) like Chime are also taxed as income. Dividends, gains from investment sales, tips, and business income all count toward your income related taxes.

Since we’re learning about the basics of finance with a focus on investing, you should know there are a few other types of income, but we’ll break those down when we get to investing. Ordinary Income is what we’re focused on currently.

The most overlooked tax for most people is Sales Tax. Only five states have no sales tax, Alaska, Delaware, Montana, New Hampshire, and Oregon. From there, it peaks in California at 7.25%. Some states even allow cities to add more sales tax on top of the state rate allowing places like some cities in Louisiana to exceed 10% sales tax. Even taking an average of 5% you end up paying $500 in taxes for every $10,000 of spending.

Something that is intrinsically tied to sales tax is Excise Tax, sometimes known as “Sin Tax,” it usually applies to Gas, Tobacco, Alcohol, and other items, but you rarely see the charge as it’s baked into the shelf price. Then sales tax can be applied on top of this tax. For example in Ohio, gasoline has a $0.385 excise tax per gallon of gas, plus a federal $0.184 cents per gallon. Which means to get Gas back down to $1 per gallon a gas station would need to buy the gas at less than $0.431 per gallon to make zero profit and break even.

Lastly, we have Property Tax. In most states this will be only related to any land or buildings that you own, but in some places it can include your car, or other “movable property.” These are usually under a category Personal Property Tax. Most land based property taxes range from 0.5% to 2% of the asset’s value.

Let’s take a broken down look at a $50,000 single earner, living in Ohio. We’ll assume with current real estate and the 30% rule that the person bought a $200,000 house:

Tax	Cost	Note
FICA	$3,825	FICA is 7.65% of income.
Federal Income Tax	$3,820	Standard deduction is $16,100 (2026) lowering taxable income to $33,900.
Ohio Income Tax	$659	2026 set flat tax to 2.75% of income above $26,050, but ignores standard deduction.
Property Tax	$2,660	Statewide average is 1.33% of our $200,000 value.
Excise Tax (Gas)	$207	No vehicle taxes in Ohio, but lets assume average of gas tank of 14 gallons, filled up every two weeks.
Sales Tax	$650	Ohio is 5.75% sales tax with local rates usually pushing it to 6.5%, although groceries and take out food are not taxed.
Total	$11,821	23.64% of total income.

Effective tax rate for federal is 7.6% of gross income, but their ‘tax bracket’ is 12%. We’ll guess on Gasoline taxes, and assume our single person refills their 14 gallon tank every 2 weeks for 364 total gallons of gas per year total excise taxes are $0.569 per gallon. We’ll also assume they bought at least $10,000 worth of things during the year.

So while their effective income tax rate was 16.6%, the actual tax rate after accounting for all the other taxes raised them up to 23.64%. While we haven’t covered retirement accounts yet, capping a 2026 IRA at $7,500 drops federal taxes to $2,920, and Ohio to $393. Saving the person $1,166 in taxes. Taking their total tax rate down to 21.31%.

Any questions or topics you’d like me to focus on feel free to comment below.

Term	Definition
Tax	A tax is a mandatory financial charge or contribution imposed by a government (federal, state, or local) on individuals, businesses, or other entities to fund public services, infrastructure, defense, social programs, etc. It’s not a voluntary payment—failure to pay can result in penalties. Taxes come in many forms (income, sales, property, payroll, etc.), and the U.S. system includes federal taxes administered by the IRS, plus state/local variations.
Income Tax	Income tax is a tax levied on the income earned by individuals or businesses during a tax year. In the U.S., the federal income tax is progressive (higher rates on higher income levels) and applies to wages, salaries, tips, interest, dividends, rental income, business profits, and more (after deductions and exemptions). It’s calculated on taxable income (gross income minus allowable deductions). States often have their own income taxes too. The IRS collects it via withholding from paychecks or quarterly estimated payments.
FICA Tax	FICA tax stands for Federal Insurance Contributions Act tax. It’s a payroll tax that funds Social Security and Medicare programs. Components (2025 rates, employee share): • Social Security: 6.2% on wages up to the wage base ($176,100 in 2025; $184,500 in 2026). • Medicare: 1.45% on all wages (no cap). Total employee FICA rate: 7.65% (employer matches another 7.65%, for 15.3% combined). Self-employed pay both shares (15.3%, with some deductions). Additional Medicare tax (0.9%) applies for high earners (e.g., over $200,000 single). Unlike regular income tax, FICA is flat-rate and applies only to earned wages (not investment income).
High Yield Savings Account	A type of savings account that pays a significantly higher interest rate (expressed as APY, or annual percentage yield) than traditional savings accounts, often 10–20 times (or more) above the national average for standard accounts. This allows your money to grow faster through compound interest while remaining safe (typically FDIC-insured up to $250,000), liquid (easy access to funds), and low-risk—ideal for emergency funds or short-term savings.
Ordinary Income	Refers to most types of earned or unearned income taxed at regular federal income tax rates, including wages, salaries, tips, business income, and—importantly—interest earned from savings accounts (including high-yield ones). The interest you earn on a HYSA is reported to the IRS (via Form 1099-INT if over $10) and taxed as ordinary income in the year it’s credited, even if you don’t withdraw it. Only the interest is taxed—not your principal deposits.
Tax Bracket	A range of income taxed at a specific, progressive rate in a graduated tax system. Instead of taxing all income at one rate, the U.S. system applies higher rates only to the portion of income that exceeds certain thresholds, meaning you pay different rates on different chunks of your earnings.
Sales Tax	A consumption tax imposed by governments on the sale of goods and services, typically calculated as a percentage of the purchase price and collected by retailers from consumers at the point of purchase.
Excise Tax	An indirect, per-unit or percentage-based tax imposed on specific goods, services, or activities—such as fuel, tobacco, alcohol, and air travel—rather than on general sales. Often included in the product’s price, these taxes are typically levied to reduce consumption of certain items (sin taxes) or to fund related public services.
Property Tax	An ad valorem (based on value) tax levied by local governments on real estate, including land and buildings. As the primary revenue source for municipalities and counties, these taxes fund essential public services like schools, police, fire departments, road maintenance, and libraries.
Personal Property Tax	An annual tax levied by local governments on movable, tangible assets like vehicles, boats, and business equipment. Unlike real estate tax, it applies to items that can be moved, with rates typically based on the asset’s assessed value. It is often referred to as tangible property tax, vehicle tax, or business personal property tax.
30% Rule	A widely used financial guideline suggesting that an housing expenses—including rent/mortgage, utilities, taxes, and insurance—should not exceed 30% of a household’s gross monthly income.

~~Miniwing~~
Investor, Stoic, Parent