In tax law, words don't always mean the same thing as they do in everyday speech. To the IRS, you having zero "taxable income" means you don't owe a penny of income tax. Even if your deductions and exemptions wipe out all your income, however, you may still end up having to pay tax for other reasons.
When you're self-employed, there's nobody to take out Social Security and Medicare from your paycheck. There's also no employer to pay part of your taxes. Instead, as employer and employee combined, you pay a 13.3 percent -- as of 2012 -- self-employment tax. You pay whenever you report net self-employment income greater than $400 on Schedule C. You have to pay even if you claim enough tax deductions on your 1040 to wipe out your earnings.
If you earn tips as a regular part of your job, they're as taxable as your hourly wages. Normally, your employer takes out withholding when you report your tips for the month, but you don't report tips under $20. Instead, you report those tips to at the end of the year and pay in extra tax accordingly. Even if you didn't earn enough to pay income tax on unreported tips, you pay Social Security and Medicare taxes.
When you order something from an out-of-state vendor, you're not charged sales tax. Many states impose a use tax on such purchases to make up for the sales tax you're not paying. If the retailer doesn't charge you use tax, the state expects you to pay anyway by including your total use tax in your state income-tax payment. When you don't keep records, you pay based on your adjusted gross income, rather than your taxable income.
Alternative Minimum Tax
The government created the alternative minimum tax to catch high-income taxpayers who report zero taxable income. AMT works by requiring you to recalculate your tax bill with certain deductions excluded or increased. You may have no taxable income under the regular rules, but with the AMT, that can change. The tax originally targeted only taxpayers who made over $200,000 but it isn't adjusted for inflation. As of 2012, if you're a single filer with more than $33,750 in income -- according to the AMT formula -- you may have to pay. The IRS has an online program you can use to figure if you're at risk.
- Internal Revenue Service: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS: Reporting Tip Income
- North Carolina Department of Revenue: Frequently Asked Questions About Use Tax
- California State Board of Equalization: Make Online Purchases? You May Owe Use Tax?
- IRS: Alternative Minimum Tax
- Bankrate: Beware the Costly, Complicated AMT
- What Percentage of a Worker's Gross Income Is Withheld for Medicare?
- Are Social Security Taxes Figured on Gross or Net Profit?
- How to Calculate How Much You Get Back from Income Tax
- Taxable Wage Definition for Social Security Taxes
- How Much to Set Aside for Taxes for Freelancing
- How to File Social Security Income Tax
- Is Royalty Income Subject to Social Security Tax?
- How Much Taxes Do I Need to Pay Per Deduction on My Check?