A beginner-friendly guide to US Personal Income Tax (+ Expert tips)

Are you a business owner unclear about how personal income tax works in the United States?

This is a common situation for many foreign business owners who incorporate companies in the US.

The company operates smoothly until it receives a notice from the IRS requesting clarification of personal tax obligations for shareholders, directors, and key personnel.

At this point, they scramble to find tax experts, research regulations, learn calculations, and report according to IRS requirements.

If you don't understand the principles of US personal income tax from the beginning, you can easily find yourself in a passive position.

Therefore, this article, with insights from our US tax and accounting experts, will help you understand the fundamentals of US personal income tax and avoid mistakes from the start.

1. What is personal income tax in the US?

According to the definition by the US tax authority, the IRS, 

Personal Income Tax is a tax that individuals must pay to the US government based on total income earned during a fiscal year.

Notably, the US tax system uses the "worldwide" principle.

US citizens or permanent residents in the US must declare and pay taxes on all worldwide income to the IRS, regardless of which country the income was earned in.

Declared income may change depending on double tax avoidance agreements between the US and other countries (Double Tax Avoidance Agreement, "DTA").

Additionally, the US personal income tax system operates on a self-assessment principle.

Taxpayers are responsible for calculating, declaring, and paying taxes on time themselves.

The IRS (Internal Revenue Service) is the agency responsible for collecting taxes and checking the accuracy of tax returns.

For example, a business owner registers a company in the US with a salary of $100,000/year and rental income from Europe of $20,000/year.

Despite living and working in Europe, the business owner must still declare a total income of $120,000 on their US tax return.

However, they may apply the Foreign Earned Income Exclusion policy to exclude part of foreign work income and the Foreign Tax Credit to avoid double taxation.

How many types of personal income tax are there in the US?

The US has 2 main types of personal income tax that businesses need to understand: Federal personal income Tax and State personal income tax.

Although both are called personal taxes, these 2 types are completely different due to many factors such as governing agencies, state regulations, and tax calculation methods.

2. Who must pay U.S personal income tax?

In general, individuals paying income tax will fall into one of 3 categories:

2.1. US citizens and Permanent residents

All US citizens and permanent residents (Green Card holders) must pay personal income tax on worldwide income, regardless of where they live in the world.

2.2. Tax residents in the US

Foreigners are considered tax residents ( if they meet one of two criteria: through the Green Card Test or the Substantial Presence Test.

Note from the IRS for the Substantial Presence Test

A person is considered a tax resident if they meet both of the following conditions:

• Present in the US for at least 31 days in the current year
• Present in the US at least 183 days during a 3-year cycle (current year and 2 previous years), calculated using the formula:
  • All days in the current year
  • 1/3 of the days in the previous year
  • 1/6 of the days in the second previous year

For example, a study abroad consulting company shareholder frequently travels to the US to work with schools there, with the following schedule:

• 2024: 120 days
• 2023: 90 days
• 2022: 60 days

120 + (90 × 1/3) + (60 × 1/6) = 120 + 30 + 10 = 160 days

Since 160 < 183 and the shareholder was present 120 days > 31 days in 2024, this shareholder does not meet the Substantial Presence Test and is not considered a tax resident.

2.3. Non-tax residents  in the US

Non-resident aliens only need to pay taxes on income sourced from the US.

If the business owner is a shareholder, director, or employee of a US company, the business will need to pay taxes.

These are typically business owners living abroad who incorporate companies in the US.

3. When do you need to pay personal income tax in the US?

You must declare and pay personal income tax in the US if you fall under the categories specified by the IRS.

Regardless of which category you fall under, you must prepare tax returns and file on time and pay the correct amount of tax required each year.

• Tax return filing deadline: April 15 of the following year (or the next business day if it falls on a weekend/holiday). Example: 2024 taxes will be filed on April 15, 2025
• Tax return extension: You can extend the filing deadline to October 15 by submitting Form 4868
• Pay full tax amount each year

For businesses opening partnership-type companies in the US or S-Corps (Companies that must pay personal income tax instead of corporate income tax):

• Partnership types like Partnership (multi-member LLCs) or S-Corp: filing deadline is March 15
• You can extend 6 months (until September 15) using Form 7004

Generally, these are the 3 most common cases that a  person has to pay US personal tax

• Minimum income threshold by group according to Framework A - For Most People

• Impact of dependency status according to Framework B - For Children and Other Dependents

• Self-employment income from $400, tax debt, according to Framework C - Other Situations Where You Must File

4. An overview of the US federal tax system

4.1. How does the US federal tax system for individuals work?

The US federal personal income tax system applies progressive tax rates. 

A US progressive tax rate means that income is taxed in brackets. As your income increases, only the income that falls into higher brackets gets taxed at higher rates. 

This system divides income into different tax brackets, each bracket having its tax rate. Currently, the US federal tax for individuals has 7 tax levels, including 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For example, Ms. Hanna has taxable income of $80,000 for 2024. The tax calculation is as follows:

• 10% bracket: $11,000 × 10% = $1,100
• 12% bracket: ($44,725 - $11,000) × 12% = $33,725 × 12% = $4,047
• 22% bracket: ($80,000 - $44,725) × 22% = $35,275 × 22% = $7,761
• Total tax due: $1,100 + $4,047 + $7,761 = $12,908

4.2. Does marital status affect tax rates?

Marital status affects the tax rates that individuals must apply.

The IRS divides taxpayers into different groups based on marital status: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er).

Each group has different tax rate brackets and standard deduction levels.

4.3. Latest 2025 federal tax rate brackets

Below is the federal personal income tax table in the US for tax year 2025 (applied when filing taxes in 2026), presented by income threshold and filing status.

Marital status (single, family) and taxable income in the previous year will determine the tax rate business owners must pay.

5. What tax benefits are available for individual taxpayers in the US?

In the US, individual taxpayers can benefit from some important tax advantages in 2 main forms: tax deductions and tax credits.

Depending on each situation and government support policies, business owners will apply appropriate benefits.

5.1. Tax deductions

Tax deductions help reduce the portion of income subject to tax, thereby reducing the amount of tax businesses must pay.

The US has three main types of deductions:

Standard deductions

This is a fixed deduction amount that businesses can choose without needing to itemize detailed expenses. For 2024, the standard deduction is $14,600 for single individuals and $29,200 for married couples filing jointly. 

You simply need to fill in line 40 of Form 1040.

Itemized deductions

If businesses have many qualifying expenses, they can itemize instead of choosing the standard deduction. This requires submitting an additional Schedule A form.

Common items include: mortgage interest and charitable contributions. However, if the total of these items is lower than the standard deduction, businesses should choose the standard deduction to save on taxes.

Above-the-line deductions

These are deductions applied before calculating taxable income, usually located on lines 23-35 of Form 1040.

Some common examples include: student loan interest, contributions to IRA retirement funds, or self-employment tax deductions.

These items usually require additional supporting documentation.

5.2. Tax credits

Tax credits help you directly reduce the amount of tax you must pay (and can even be refunded if you overpay). Some common tax credits include:

• Earned income tax credit (EITC) – for people with low income;
• Child tax credit – worth up to $2,000 for each qualifying child;
• Child and Dependent care credit – for child or dependent care expenses;
• Foreign tax credit – for taxes already paid abroad;
• American opportunity tax credit and Lifetime learning credit – for college expenses.

6. How to prepare US personal income tax returns ?(+ Expert tips)

Filing your taxes doesn't have to be stressful if you prepare ahead of time and follow the right steps. Here's an easy guide to help you complete your tax return accurately and on time.

6.1. Our expert tips to help you file correctly

Many people only think about taxes during tax season, but this is a mistake. Planning throughout the year helps you:

1. Save time and reduce stress
2. File accurate returns
3. Pay the right amount of taxes
4. Get refunds faster

If you don't plan, the IRS might audit your account and penalize you for underpaying taxes.

To ger ready, our experts recommend that you do these first 3 things

Set up a good filing system

• Create folders on your computer and phone just for taxes
• Make separate folders for each tax year
• Sort documents by type: income, expenses, tax credits, deductions
• Keep both paper and digital copies

Keep and save these important documents

• Receipts and invoices for expenses
• Records of all income and expenses for the year
• Copies of previous tax returns

Track important life events

These events affect how you file taxes, so keep track of them:

1. Moving to another state (changes state taxes)
2. Getting married or divorced (changes your filing status)
3. Having children gives you family tax benefits)
4. Retiring (changes your income sources)
5. Starting a business (changes how you calculate taxes)

6.2. Step-by-step easy tax filing process

7. How can Global Link Asia Consulting help you calculate and pay the US personal income tax?

Understanding U.S. personal income tax isn’t a one-and-done task. It’s something you’ll revisit every year, and getting comfortable with the basics now can save you headaches later. 

 And to make filing even smoother, you can always count on our experts to help you make your US personal tax filing a stress-free experience.

Global Link Asia Consulting has 10 years of experience helping international entrepreneurs succeed in the U.S. market.

We provide professional services to help businesses set up, grow, and stay compliant with U.S. regulations. With our support, you can build a strong foundation and expand with confidence.

• Register a company in the U.S in your chosen state;
• Open a corporate bank account in the U.S with a 99% success rate;
• Choose the right company types for tax optimization in the U.S;
• Apply for US business licenses;
• Get an affordable, professional registered office address for business;
• Support to open, authenticate, and manage Stripe Paypal Business in Singapore, Hong Kong, and the U.S;
• Handle all your tax accounting needs, timely annual filings, auditing, and more.

8. FAQs about franchise tax in Delaware

We offer a comprehensive range of accounting and tax services for US companies. Our services include:

• Tax Consulting for LLC companies.
• Monthly/Annual Tax Accounting services in accordance with US GAAP.
• QuickBooks Consulting and Licensing.
• Corporate Income Tax Return Preparation.
• Sales Tax Return Preparation.

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