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Governments generally raise the money they need to perform their different functions through taxes. These can take the form of taxes on purchases, services, or income. Governments that tax their citizens' income generally take a portion of each paycheck in what is sometimes called a federal payroll deduction.
Countries that use an income tax have different laws dictating how much each citizen must pay. By taking a federal payroll deduction from each paycheck, the total amount the citizen is required to pay is spread out over the course of a year. It is generally the employer's responsibility to deduct the appropriate amount from each worker's pay, and the exact amount withheld is usually based on an estimate of what the employee will earn over the course of the year. This amount is calculated so that the employee pays exactly the taxes he or she owes, on estimated income, by the end of the year. If the worker earns more in one month than in another, his or her estimated total income goes up, but if that person earns less in a month than in previous months, the estimated total income is reduced.
In many nations that tax citizen income, some workers — such as independent contractors — are paid in ways that do not automatically deduct taxes. Rather than having federal payroll deductions from every paycheck, such workers are usually responsible for tracking how much money they owe the government. This amount generally has to be paid in full by a certain date, which varies from country to country. Some nations also require that such citizens make tax payments directly to the government on their estimated annual income throughout the year, similar to federal payroll deductions.
At the end of the year, citizens that live in countries with income taxes know their exact annual income. Taxpayers then usually calculate, sometimes with the help of an accountant, how much the law says they owe the government. Depending on the particular nation's tax law and the taxpayer's financial activities that year, the amount he or she owes may not be the same as the amount collected through federal payroll deductions. If the amount is less than the federal payroll deductions collected, the taxpayer is usually entitled to a refund for the difference. If the amount is more than the federal payroll deductions paid, individual must pay the difference.
Workers who pay income taxes generally keep detailed records of their financial activities over the course of a year. Tax laws in some countries allow taxpayers to deduct certain expenditures from the total amount of taxes they owe. Taxpayers that take these deductions from their income taxes, however, have to have evidence of these expenditures if the government asks for them. Citizens who cannot provide such records could face fines or even prison time.
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