Income tax in the United States is collected by three separate levels of government: the Internal Revenue Service for the federal government, a state revenue or taxation department in most states, and, in parts of about 17 states plus the District of Columbia, a city, county, or school district tax office. For most workers, none of that collection happens directly. Your employer withholds the money from each paycheck and forwards it to the right agencies on your behalf. People who work for themselves send payments to each agency directly.
The IRS Collects Federal Income Tax
The IRS is a bureau of the U.S. Department of the Treasury. Under 26 U.S.C. ยง 7801, the Secretary of the Treasury has full authority to administer and enforce federal tax law, and the IRS was created to carry that out.1Internal Revenue Service. The Agency, Its Mission and Statutory Authority It processes individual and business returns, checks that the numbers match what employers and other payors reported, and issues refunds when you paid in more than you owed.
When federal tax goes unpaid, the IRS can file a lien against your property, levy your bank accounts or wages, and seize assets in serious cases. Cases involving intentional fraud go to the IRS Criminal Investigation division. A federal tax evasion conviction carries up to five years in prison2Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax and fines up to $250,000 for individuals under general federal sentencing rules.3Office of the Law Revision Counsel. 18 USC 3571 – Sentence of Fine
State Revenue Departments Collect State Income Tax
More than 40 states impose their own personal income tax, collected by state-level departments of revenue or taxation. These agencies operate independently from the IRS and follow their own tax codes, though many use your federal adjusted gross income as the starting point. Each state sets its own brackets, credits, and deductions.
State filing deadlines generally line up with the federal April deadline. Settling your federal balance does not settle a state one. State agencies issue their own penalties and interest, and they can pursue you for unpaid state tax on their own schedule, separate from anything the IRS does.
States That Don’t Collect Income Tax
Nine states impose no personal income tax at all. They fund their operations through other sources, such as sales taxes, property taxes, or natural resource royalties. If you live in one of those states, you still owe federal income tax and possibly local tax, but there is no state income tax return to file.
Local Tax Offices Collect City and County Income Tax
About 17 states and the District of Columbia allow cities, counties, or school districts to collect their own income taxes on top of federal and state amounts. Local rates are usually a flat percentage of gross wages, often between 1% and 3%, rather than the graduated structure the IRS uses. Some jurisdictions require a separate local return; others collect through a centralized state system.
The naming is inconsistent. Depending on where you live, the local levy may be called an earned income tax, an earnings tax, an occupational privilege tax, or a local services tax. The label matters less than the fact that failing to register or file can generate delinquent notices and late fees that can end up larger than the underlying tax.
Employers Do the Actual Collecting for Most Workers
If you get a paycheck, the practical collector of your income tax is your payroll department. Federal law requires every employer to deduct income tax from employee wages before issuing the check.4Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source How much comes out depends on the information you put on Form W-4: filing status, dependents, and any extra withholding you request.
Employers forward the withheld money to the IRS and to any applicable state and local agencies on a regular deposit schedule. A business that withholds tax from paychecks but does not turn it over faces the Trust Fund Recovery Penalty, under which individual owners, officers, or other responsible persons can be held personally liable for the full unpaid amount, not just the business entity.5Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
Employers and other payors also report your income to the IRS through information returns. Form W-2 reports employee wages. Various 1099 forms cover payments from non-employers. Form 1099-NEC reports payments of $600 or more to independent contractors. Form 1099-K reports payments processed through third-party platforms when totals exceed $20,000 across more than 200 transactions in a calendar year.6Internal Revenue Service. Understanding Your Form 1099-K These filings let the IRS cross-check what you report on your own return.
If No Employer Withholds for You
Freelancers, independent contractors, and gig workers have no one withholding for them. You send payments directly to the IRS, and to state and local agencies where they apply, through quarterly estimated tax payments. For the 2026 tax year, those payments are due April 15, June 15, and September 15 of 2026, and January 15 of 2027.7Internal Revenue Service. Publication 509 (2026), Tax Calendars When a due date falls on a weekend or federal holiday, it shifts to the next business day.
Self-employed people also owe self-employment tax on top of income tax. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.8Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Social Security applies only to the first $184,500 of net earnings in 2026;9Social Security Administration. Contribution and Benefit Base Medicare applies to all net earnings with no cap. An extra 0.9% Medicare surtax applies once total earnings exceed $200,000 for single filers or $250,000 for married couples filing jointly.
If you skip estimated payments or underpay by a large margin, the IRS charges an underpayment penalty calculated as interest on each quarter’s shortfall.10Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty You can generally avoid it by paying at least 90% of the current year’s tax or 100% of the prior year’s tax through withholding and estimates combined.
What Happens if the Collectors Don’t Get Paid
The IRS charges two separate penalties, and both can hit at once.
- Failure to file: 5% of the unpaid tax for each month or partial month your return is late, capped at 25%. If you file more than 60 days late, the minimum penalty is the lesser of $435 or the full tax owed.11Internal Revenue Service. Failure to File Penalty
- Failure to pay: 0.5% of the unpaid tax for each month or partial month the balance sits, also capped at 25%. That drops to 0.25% per month if you have an approved payment plan.12Internal Revenue Service. Failure to Pay Penalty
When both apply in the same month, the failure-to-file amount is reduced by the failure-to-pay amount, so the combined charge is 5% per month rather than 5.5%. Interest accrues on top, compounding daily at a rate the IRS adjusts each quarter.13Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax State and local agencies impose their own separate penalties on their own separate balances.
These are civil penalties. They apply whether or not you meant to cheat. Willfully refusing to file, or hiding income on purpose, can move a case from civil collection to criminal prosecution through IRS Criminal Investigation. Filing late is always better than not filing, and paying part of the balance reduces the amount the penalties are calculated on. If you cannot pay in full, the IRS offers installment agreements and, in some cases, a reduced settlement through its Offer in Compromise program.