It is commonly said that there are two things certain in life, death, and taxes. Everyone, whether you are an individual, a family unit, or a business must pay taxes each year. It is important to understand what your tax liability is and how to calculate it. This article will define tax liability, discuss how to calculate tax liability and the different tax rates incurred by different forms of businesses.
Taxes for individuals are fairly straightforward and all individuals and families are taxed essentially the same. Therefore, this article will solely focus on the unique scenarios of tax liability for businesses.
What is Tax Liability
Generally, tax liability is the amount of money you owe to the government. The term tax liability is used most frequently when referring to federal income tax liability.
Individuals and organizations accrue tax liabilities with each taxable event they partake in. Taxable events include earning income, making sales, and issuing payroll. Individuals and businesses can reduce their total tax liabilities by claiming deductions, exemptions, and tax credits.
How to Calculate Tax Liability
The most important factor in calculating a business’s tax liability understanding what entity type that business is. C corporations are taxed twice, at both the corporate and shareholder levels. However, for other business entities (often known as pass-through entities) the tax rate will depend on the entity’s taxable income and filing status.
Taxable income minus tax deductions equals a pass-through entity’s gross tax liability. Gross tax liability minus any eligible tax credits equals the entity’s total income tax liability.
Different Tax Rates for Different Business Entities
While there are several different entity types (such as sole proprietorships, partnerships, or limited liability companies) for the purpose of tax liability there are only C corporations and pass-through entities. This is because C corporations are the only entity type that pays corporate income taxes. For all pass-through entities, taxes are only paid by the owners and shareholders who pay at their individual tax rates. Individual tax rates are progressive (the rates increase as your taxable income increases) and can be as high as 37%.
Figuring out the tax rate for C corporations used to be much more difficult because the corporate tax rate was decided by a graduated tax rate schedule that included eight different tax rate brackets. However, the Tax Cuts and Jobs Act immensely simplified this process by implementing a flat 21% tax rate. If you own a C corporation, no matter the size of the business or how much taxable income the business has, your income tax rate will be 21%.
C corporations are also subject to what is called double taxation. This occurs when a C corporation generates a profit for the year and distributes that profit to shareholders in the form of a dividend. The process gets its name of double taxation because the profits are taxed first at the corporate level and again by the recipient of dividends at the individual level.
Types of Taxes Paid by Businesses
In addition to income tax for individuals, businesses are subject to several different types of taxes. These taxes include:
1. Payroll tax: After an employer has calculated and withheld the applicable taxes from employee paychecks, such as for federal income tax withholding and FICA (Federal Insurance Contributions Act), they must also:
- set aside the amount they must pay for FICA taxes as a business
- make payments to the IRS based on their total employee payroll
- report on payroll taxes quarterly using Form 941 or through electronic filing
2. Income tax: Businesses must also pay income tax. Non-corporate tax rates depend on the reported income of the business’s owner(s). Business owners must pay both their income tax and self-employment tax. Self-employment tax is your FICA tax and includes both Social Security and Medicare taxes.
3. Capital gains tax: A business will have to pay capital gains tax if the business’s assets appreciate, or the business makes a profit from the sale of business assets. The capital gains tax only taxes the difference between the asset’s initial value and that asset’s increase in value. The capital gains tax rate is based on whether your gain is long-term or short-term.
4. Property tax: Property taxes are assessed by local entities and are only assessed against “real property,” such as land or buildings.
5. Dividend tax: Dividends are a portion of a company’s profits that are paid to shareholders and are taxed based on how and when you own an investment.
Partner with a Trusted Tax Accountant at Eco-Tax
Calculating a business’s tax liability can be complicated and time-consuming. For many business owners, it is beneficial to employ the help of a tax professional. Eco-Tax, Inc. offers several services, including tax planning services. When you work with Eco-Tax you will have a dedicated accountant who will be your trusted advisor in preparing and filing your year-end business and personal income tax returns. Your accountant will ensure that you take advantage of every tax benefit and reduce your taxes.
Eco-Tax also offers secure online filings. Eco-Tax’s secure online portal is easy, convenient, safe, and provides you 24/7 access to all of your documents. You will also get unlimited consultations with Eco-Tax. Eco-Tax’s advisors’ goal is to help you achieve the financial success you deserve.
When you employ the help of an Eco-Tax advisor they prepare all of your year-end business and personal tax returns. In addition to handling your year-end tax returns, you will also receive quarterly projections for your estimated tax payments from that quarter, automatic reminders for important tax deadlines, and timely notifications of any important tax updates.
With several different tax planning and preparation bundles available, Eco-Tax can help you calculate your tax liability no matter you and your business’s individual needs.