Your turn
Each lab is one step from the video. Tap, slide and pick, and watch where the money goes.
Each lab isolates one idea. Figures: 2026 IRS payroll rates and withholding tables (single filer), FY2025 Treasury outlays. Not tax advice.
Tap the pictures and slide the sliders.
Change Sam's pay. Which slices grow as fast as the pay, and which one grows faster?
Social Security and Medicare are flat percentages; income tax withholding follows the Pub 15-T brackets, so its share rises with pay.
Tap a line on the paper. Slide to give Sam more pay.
Tap the school, the fire truck, the road, the park and the bus. Which ones are paid for close to home?
Tap each service to see which level of government mainly funds it.
Tap the circles. Who helps pay for the fire truck?
Pick a layer. Which taxes feed it, and what does it pay for?
Each layer leans on a different tax base: income and payroll, sales and income, property.
Change the price or the rate. When does the tax go over ten dollars?
Sales tax = price × combined state and local rate. Try the 0% of the five states without a statewide sales tax.
Slide the price. Does the extra bit get bigger too?
Tap a slice. Then pretend you paid some of it: how much went to defense?
Tap a category for details. The slider splits a pretend payment by FY2025 outlay shares (U.S. Treasury, Monthly Treasury Statement).
Payroll taxes actually go only to Social Security and Medicare; the split shows the budget as a whole.
Give Sam more paychecks. When does the refund shrink to almost nothing?
Withheld tax grows with every paycheck; tax owed starts only above the standard deduction.
A simple model: tax owed = 10% of pay above $16,100 (2026 standard deduction). Real returns can include credits. How the rates rise with income: how tax brackets work.
Taxes are money that people give to the government. The government uses it to pay for things we all share.
Sam sells ice cream at the beach. When Sam gets paid, a little bit of the money is taken out first. That bit is tax.
One person can't buy a fire truck, a road or a school. They cost too much! But when everybody gives a little, the whole town can have them, and everybody shares.
When Sam buys new shoes, Sam pays a little more than the price. That extra bit is a tax too. It helps pay for roads and schools.
At the end of the year, Sam fills in a form. Sam paid too much tax, so some money comes back. It was Sam's money all along!
This page explains how taxes work; it isn't tax advice. Figures are for the United States, and the examples use a made-up teen, Sam, with round numbers.
Taxes are required payments of money to governments. Governments use them to provide public goods and services for the community as a whole.1 Some things are too big, too expensive or too shared for anyone to buy alone: a road, a fire department, a navy, streetlights.1 So everyone chips in a little, through taxes, and the whole community shares them.
In the United States you mostly meet taxes in three places:
Once a year, people file a tax return to check that what was taken from their paychecks matches what they really owed.46
Say Sam earns $1,000 for two weeks of scooping ice cream. The paycheck shows about $885. Here's where the rest went, using 2026 IRS rates and withholding tables for a single worker:23
| Line on the pay stub | Rule | Sam's $1,000 |
|---|---|---|
| Social Security | 6.2% of pay (the employer pays another 6.2%) | −$62.00 |
| Medicare | 1.45% of pay (the employer pays another 1.45%) | −$14.50 |
| Federal income tax withheld | IRS Publication 15-T tables, based on the W-4 form | −$38.08 |
| Take-home pay | $885.42 |
Social Security and Medicare are called payroll taxes (or FICA). Together they're 7.65% of your pay, and your employer matches them.2 Unlike income tax, this money goes into trust funds that pay only for those two programs: retirement, disability and survivor benefits for Social Security, and hospital care for older and disabled people for Medicare.10 In 2026 the Social Security tax stops once someone earns $184,500 in the year; the Medicare tax has no limit.2
The income tax line is called withholding. The federal income tax is "pay-as-you-go": your employer holds back an estimate from each paycheck and sends it to the IRS in your name.4 When you start a job, you fill out a Form W-4 so your employer can work out how much to withhold.5 Your state and city may withhold their own income taxes too.
How much federal income tax you actually owe depends on your taxable income and the tax brackets. That's a whole explainer of its own: How do tax brackets work?
Americans pay taxes to three layers of government, and each layer leans on different taxes.1215
| Layer | Main taxes | Pays for (examples) |
|---|---|---|
| Federal | Individual income tax, payroll taxes, corporate income tax, customs duties, excise taxes | Social Security, Medicare, Medicaid (shared with states), defense, veterans, interest on debt |
| State | Income tax and/or sales tax (varies a lot by state) | Universities, highways, state police, and money passed on to schools and Medicaid |
| Local (cities, counties, school districts) | Property tax, some local sales tax | Public schools, police and fire, parks, libraries, local streets |
At the federal level, individual income tax is the biggest source of money, and has been since 1944.12 In fiscal year 2025 it brought in about $2.66 trillion, roughly half of all federal revenue. Payroll taxes brought in about a third, and corporate income tax about 9%.9
At the local level, property tax is king. It made up nearly half (48%) of the money local governments raise themselves for general purposes in 2021.13 That matters for schools: local governments do 99% of the direct spending on public elementary and secondary schools, and schools take about 39% of local spending.16 Roads are a team effort: in 2021, state and local governments paid about three quarters of road and highway costs, and federal money paid about a quarter.17
Sales tax is a percentage of the price, added at the checkout. The store collects it and passes it on to the government.14 If Sam buys $60 shoes where the combined sales tax rate is 7%:
$60 × 7% = $4.20 → total $64.20
Rates depend on where you shop. In 2022, statewide rates ran from 2.9% in Colorado to 7.25% in California, and many cities and counties add their own local sales tax on top. Alaska, Delaware, Montana, New Hampshire and Oregon have no statewide general sales tax (though some Alaska towns have a local one).14 Some purchases, such as gasoline, also carry special taxes called excise taxes.12
Sales tax is one reason the price on the shelf and the price you pay can differ. Prices themselves can also rise over time, and that's a different story: what causes inflation.
The federal government's budget year, its fiscal year, runs from October to September. In fiscal year 2025 (October 2024 to September 2025), the federal government spent about $7.01 trillion. Here's how the U.S. Treasury's Monthly Treasury Statement splits that spending into its biggest categories:9
| Category | Amount | Share |
|---|---|---|
| Social Security | $1.58 trillion | 22.5% |
| Medicare | $997 billion | 14.2% |
| Health (mostly Medicaid, plus public health and research) | $979 billion | 14.0% |
| Net interest on the debt | $970 billion | 13.8% |
| National defense | $917 billion | 13.1% |
| Income security (food aid, unemployment pay, housing help, federal retirement) | $702 billion | 10.0% |
| Veterans' benefits and services | $377 billion | 5.4% |
| Everything else (transportation, education, science, justice, agriculture and more, minus offsetting receipts) | $488 billion | 7.0% |
Within "Health", grants to states for Medicaid were about $668 billion. Within "Income security", the Supplemental Nutrition Assistance Program (SNAP) was about $106 billion.9 The federal government pays nearly two-thirds of Medicaid's costs; the states pay the rest and run the programs.16
The same year, the government collected about $5.23 trillion.9 The gap, about $1.78 trillion, is the deficit, and it was covered by borrowing. Borrowing is also why interest is such a big slice: interest is what the government pays on the money it has already borrowed.111
Who decides the split? Congress and the President, through the federal budget. Nearly two-thirds of spending, including Social Security and Medicare, is "mandatory": it's set by existing laws and doesn't need a new vote each year. Most of the rest is "discretionary": Congress votes on it every year, and over half of that goes to defense. Interest on the debt is its own separate slice.11 Curious how those laws get made? See how a bill becomes a law.
Some things tax money pays for are easy to forget. For example, the GPS signals your phone uses are funded by general U.S. tax revenue.10
Withholding is only an estimate, so each year people file a tax return (for individuals, IRS Form 1040) for the year before. It adds up your income, works out the tax you really owed, and compares that with what was withheld.4
Back to Sam. Five paychecks of $1,000 means $5,000 for the summer, and about $190 of federal income tax withheld. Because someone else (a parent) can claim Sam as a dependent, Sam's standard deduction equals earned income plus $450, up to the normal limit. So at $5,000, Sam's taxable income is zero and Sam owes no federal income tax.7 Sam isn't required to file at that income, but the IRS points out you may want to file anyway to get back the tax your employer withheld.6 So Sam files and gets the roughly $190 back.
Two things to notice. First, a refund isn't free money. Usually it's your own money, returned because too much was held back (some credits, like the Earned Income Tax Credit, can pay out more). Second, the $382.50 of Social Security and Medicare tax doesn't come back. Students may earn too little to owe income tax, but payroll taxes still apply.5
In the explainer's refund toy, "tax owed" is a simple model: 10% of pay above $16,100, the 2026 standard deduction for a single filer, which covers a teen's first bracket.8 Real returns can include credits and other details.
The mix varies. Most other countries use a value-added tax (VAT) instead of a sales tax. A VAT is collected in small pieces at every stage, from farm to factory to shop, and it's usually already included in the price on the shelf. More than 160 countries have a VAT, including every economically advanced nation except the United States.18
The first US income tax was created in the 1860s to help pay for the Civil War, and it was later repealed.1920 From 1868 until 1913, about 90% of federal revenue came from taxes on alcohol and tobacco.20 In 1913 the 16th Amendment was ratified, giving Congress the clear power to tax incomes.19 Today individual income tax is the largest single source of federal money.12
People and businesses are required to pay part of their income, purchases and property to governments. Governments pool that money to pay for things everyone shares, like roads, schools, fire departments, the military, and programs such as Social Security and Medicare.
It depends on the tax. Social Security and Medicare taxes go to those programs' trust funds. Federal income tax goes into the general federal budget, where in fiscal year 2025 the biggest slices were Social Security, Medicare, health programs (mostly Medicaid), interest and defense. Property tax mostly funds local services such as public schools.
For a $1,000 paycheck every two weeks in 2026, a single worker has $62 withheld for Social Security (6.2%), $14.50 for Medicare (1.45%) and about $38 of federal income tax, based on the IRS withholding tables, leaving about $885 before any state or local taxes. The exact amount depends on your W-4 and where you live.
Each tax has its own base and rate. Payroll taxes are a set percentage of wages (Social Security only up to a yearly cap, and higher earners pay a little extra Medicare tax). Sales tax is a percentage of the price. Property tax is a rate applied to a property's assessed (officially estimated) value. Federal income tax uses brackets: different slices of your taxable income are taxed at rising rates.
Income tax is withheld from each paycheck as an estimate. When you file your return, you work out what you really owe. If more was withheld than you owe, the difference comes back as a refund. Usually it's your own money coming back, not a bonus (some tax credits can add to it).
Teens with a job usually have Social Security and Medicare taxes withheld, even if they earn too little to owe income tax. Many file a return anyway to get back income tax that was withheld. Everyone pays sales tax on purchases in states that have one.
The Constitution gives Congress the power to lay and collect taxes. The 16th Amendment, ratified in 1913, made clear that Congress can tax incomes.