Taxes can be confusing, even for those who need to file only a simple return. Here are some basic terms that can make navigating tax time easier.
IRS – Internal Revenue Service. The IRS is the government agency that is responsible for collecting taxes.
Tax Return – the forms you file each year to declare income and determine how much you owe or should be refunded. Individual tax return forms generally consist of the following:
• 1040 EZ – a simple form used by people who have income detailed by a W-2 form and who will take onlythe standard deduction.
• 1040 – a general form that can be used by anyone. This is also called a long form.
• 1040 A – a tax form that you can use if you don’t itemize deductions. It’s a bit more complicated than a 1040 EZ, but less complicated than a 1040.
Income – your wages, salary, or other compensation. Income is reported to the taxpayer using one of the following forms:
• W-2 form – the most recognized form, a W-2 is a way for employers to report what they have paid you and how much was withheld from your pay for various deductions such as federal, state and local taxes, retirement payments, etc.
• 1099 form – there are several types of 1099 forms. These forms are used to report income paid to a non-employee, interest paid to an individual, and other non-employee compensation.
• IMPORTANT – if your employer doesn’t send you a form such as a W-2 or a 1099, you still have to file a return. The government expects you to keep track of your own wages so that you can report your income accordingly, so save your pay stubs.
Withholding – the money that your employer takes out of your pay before giving you the rest.
Refund – if you paid too much in taxes, you’ll get some, or all, of your money back. You have to file a return to get a refund.
Audit – a process that the IRS uses to go over your records to make sure that you have paid your taxes properly.