How federal income tax is calculated—and how to pay it

By Refund Answers

Your federal income tax is not simply your salary multiplied by one tax rate. You calculate tax on taxable income, apply eligible credits and account for other taxes. Then you compare that total with withholding, estimated payments and refundable credits to find out whether you owe money or have an overpayment.

This guide covers U.S. federal personal income tax for citizens and resident aliens, not state or local calculations. The example and estimated-payment dates below are for tax year 2026—income earned in 2026, not a 2025 return filed during 2026. The linked 2025 Form 1040 illustrates the return’s structure; use the forms and instructions for the tax year you are calculating.

How the calculation works

Follow the calculation in this order:

1. Add the taxable amounts of your income. This can include wages, interest, business income and taxable retirement distributions. Not every dollar received is necessarily taxable; Form 1040 distinguishes, for example, total IRA distributions from their taxable amount. See the income section of 2025 Form 1040.
2. Subtract eligible adjustments to income. The result is adjusted gross income, or AGI. The IRS defines AGI as taxable gross income minus certain adjustments.
3. Subtract your allowable deductions. Generally, use the standard deduction or itemized deductions, plus any other deductions you qualify for. The standard deduction depends on filing status; eligibility and amounts can also change for dependents, older or blind taxpayers, and certain other filers. The 2026 Form 1040-ES worksheet includes standard deduction amounts and additional deduction categories. What remains is taxable income, floored at zero.
4. Calculate tax using the applicable rates and method. Ordinary income is taxed in layers. Qualified dividends and certain capital gains require a different calculation; don’t apply the ordinary brackets to everything. The 2026 estimated-tax instructions direct readers with those types of income to Publication 505 to figure the tax.
5. Apply credits and account for other taxes. A deduction reduces income; a credit reduces tax. Some credits are refundable and can produce money back even when you owe no income tax. Other taxes, such as self-employment tax, can increase the return’s total tax. Follow the separate credit rules and the calculation on Form 1040.

A $1,000 deduction is therefore not the same as a $1,000 credit: the deduction removes $1,000 from the income subject to tax, rather than automatically cutting the bill by $1,000.

A 2026 example: Your highest bracket does not tax all your income

Assume a single taxpayer has $76,100 of taxable wages, no other income or adjustments, qualifies for the basic $16,100 standard deduction, and has no other deductions. Their taxable income is:

$76,100 − $16,100 = $60,000.

Using the ordinary-income rates in the 2026 IRS estimated-tax schedules:

Layer of taxable income	Rate	Tax on that layer
First $12,400	10%	$1,240
Next $38,000, up to $50,400	12%	$4,560
Remaining $9,600	22%	$2,112
Total estimated regular income tax		$7,912

The highest bracket reached is 22%, but only the last $9,600 is taxed at that rate—not all $60,000. That’s the IRS’s tax-bracket principle.

This is a rate-schedule illustration before credits and other taxes. For an actual filed return, use that tax year’s required tax table or worksheet, rather than treating this example as a final bill.

How you pay during the year

Federal income tax is pay-as-you-go. The IRS generally requires payment as you earn or receive income, through withholding or estimated payments—not just a payment when you file. See the IRS estimated-tax guidance.

If you have wages or a pension

Your employer or pension provider can withhold federal income tax. That withholding is a payment toward your annual tax, not the final calculation itself.

Use the IRS Tax Withholding Estimator with recent paystubs for your jobs, pensions or annuities and, if filing jointly, your spouse’s. You may also need your most recent return and records of other income and deductions. If you need to change withholding, give the resulting Form W-4 to your employer or Form W-4P to your pension provider. The IRS recommends checking each January and after major income or family changes. The estimator is not available to people with nonresident status for U.S. tax purposes.

If withholding will not cover enough

Self-employment, investment or other income without sufficient withholding may require estimated payments. A wage earner may instead be able to increase payroll withholding.

For 2026, estimated payments are generally required if both conditions apply:

• You expect to owe at least $1,000 after withholding and refundable credits.
• Those amounts will be less than the smaller of 90% of your 2026 tax or 100% of your 2025 tax, with the prior return covering 12 months.

The prior-year percentage generally becomes 110% if 2025 AGI exceeded $150,000, or $75,000 if married filing separately in 2026. Exceptions and special rules apply, including for farming and fishing. Use the 2026 Form 1040-ES worksheet, rather than assuming the $1,000 threshold alone decides it.

The ordinary 2026 installment dates are April 15, June 15, September 15, 2026, and January 15, 2027, as listed in the 2026 estimated-tax instructions. Meeting an annual payment target does not necessarily eliminate a balance due when filing. Late or insufficient installments can also trigger a penalty—even if the return ultimately shows a refund. If income arrives unevenly, the annualized-income method may reduce or eliminate required installments for some periods; the instructions point to Publication 505 for details.

When you file: Refund or balance due?

The return compares total tax with payments and refundable credits. For example, if total tax is $8,000 and payments plus refundable credits are $8,500, the overpayment is $500. If they total $7,000 instead, the balance due is $1,000, before any separate penalty. This comparison appears in the payment, refund and amount-owed sections of Form 1040.

A larger refund does not necessarily mean a lower tax bill: it can mean more tax was withheld during the year. If you’ve already filed and need to track the payment, use our separate federal refund-status checklist.

To pay a balance or an estimated installment:

• Start at the IRS payments page. Individual Online Account and Direct Pay offer free bank-account payments; Direct Pay does not require signing in.
• Check the payment reason and tax year before submitting. Keep the confirmation number.
• If you cannot pay in full, file on time, pay what you can and review IRS payment-plan options. Interest and some penalties continue until the balance is paid.

An extension to file is not an extension to pay. If you are unsure about taxable retirement amounts, investment-tax worksheets, residency or special payment rules, stop short of using this simplified example as your calculation and get qualified tax help.