The federal government has several sources of income. The largest is the individual income tax, which provides nearly half of federal revenue. It is collected on a “pay-as-you-earn” system throughout the year, mostly by employers withholding, or taking out part of an employee’s income and sending it to the federal government. At the end of the year employers send employees a report showing how much has been withheld. Employees then fill out a tax return, a form in which people declare income to the government and figure out how much tax must be paid.

     Taxable income is a person’s gross, or total, income minus exemptions and deductions. Gross income includes income from salaries, wages, tips, and commissions, as well as from interest on savings accounts and stock dividends. Personal exemptions are set amounts that can be subtracted for an individual and for family members. Deductions include interest on a mortgage, donations to charity, and state and local taxes.

     Corporations pay a corporate income tax on their income. Corporate taxes make up about 10 percent of federal revenues. Like personal income taxes, corporate taxes are progressive. Tax rates increase as profits increase.

     The Federal Insurance Contributions Act, or FICA, taxes are also withheld from people’s salaries. Most goes for Social Security, which was established in 1935 as a retirement fund for workers. Now it also provides benefits to wage earners’ surviving family members and people with disabilities. FICA taxes also fund Medicare, a national health insurance program for people over age 65.