Taxpayer

What It Is:

A taxpayer is a person or organization that must pay taxes to a federal, state, or local agency. 

How It Works/Example:

For example, let's assume that Jane is an employee of Company XYZ. She earns $150,000 per year. 

In addition to paying federal income taxes, unemployment taxes, Social Security taxes, and Medicare taxes, Jane will likely owe state and local income taxes, all of which will be withheld from her paycheck. When she receives her after-tax paycheck, she might spend it on gas for her car, groceries, clothes and utilities, all of which trigger more tax payments (in the form of sales, excise, gas and other taxes).

Why It Matters:

Virtually every human being in America is a taxpayer at some point, even if he or she does not file an IRS Form 1040 or pay federal income taxes. People pay taxes when they pay their phone bills, buy airline tickets, use toll roads, buy gasoline, rent hotel rooms, get a fishing license or engage in other everyday activities. Children even pay sales taxes when they buy candy with allowance money.

It is important to note that for tax purposes, business entities are also taxpayers, which means their revenues and expenditures are subject to taxation.