Personal Income Tax (PIT)

What is Personal Income Tax (PIT)? 

Personal income tax (PIT) is also commonly known as “individual income tax”.  This refers to the income tax that is imposed on a person’s earned income or earnings. The Internal Revenue Service (IRS) defines earned income as income and wages that a person receives as an employee and working for somebody else or income earned from their personal business or farm. 

There are many types of earned income including:

• Wages, salary, or tips where taxes have been withheld
• Money made from being self-employed as a farm owner, business owner, minister, or statutory employee
• Income from jobs where the employer did not withhold taxes. Examples are selling goods online, running errands for others, driving a car for booked rides, and other freelance work
• Benefits from a union strike
• Certain disability benefits received before minimum retirement age

It is important to note that earned income does not include the following:

• Interest and dividends
• Social Security
• Unemployment benefits
• Alimony
• Child support
• Pensions

What are the forms for Personal Income Tax (PIT) that employers should provide? 

Generally, employers provide Form W-2 (Tax and Wage Statement) and Form 1095-C (Employer-Provided Health Insurance Offer and Coverage). Also, individuals who are self-employed contractors receive Form 1099-MISC or Form 1099-NEC. 

What can reduce Personal Income Tax (PIT)?

There are certain pre-tax deductions for benefits that can reduce an individual’s personal income tax. Because these are taken “pre-tax” or before taxes are withheld, these deductions can decrease an individual’s taxable wages and thereby reduce personal income tax. Examples of such pre-tax deductions are medical insurance premiums, retirement plan contributions, disability, child care expenses, and other expenses.