Income tax is a tax governments impose on income generated by businesses and individuals. It is used to fund public services, pay government obligations, and provide goods for citizens.
Types and Application of Income Taxes
Personal income tax, also known as individual income tax, is levied on an individual’s wages, salaries, and other income, while business income taxes apply to corporations, partnerships, small businesses, and the self-employed.
An income tax is commonly computed as the product of a tax rate times the taxable income. Tax rates may vary by type of taxpayer and income.
- The tax imposed on companies is known as corporate tax.
- Individual income is often taxed at progressive rates, where the tax rate applied to each additional unit of income increases.
- Payroll taxes, such as Social Security and Medicare, are another common tax on workers’ income.
Income taxes can be categorized into two main types:
- Flat taxes, where everyone pays the same rate.
- Progressive taxes, where rates increase at higher income levels.
Tax Rates and Calculations
- Personal income taxed at 13% tax rate and reduced by tax deductions.
- Business effective tax rate is calculated by dividing the income tax expense by the earnings before taxes.
To determine the correct tax band and personal allowance rate, use the table below:
[Insert table here]After identifying your personal allowance rate and deducting it from your salary to determine your taxable income, the income tax rate is applied to the remaining amount. The income tax is not applicable on any non-taxable income.
Remember that tax systems and rates vary significantly across different jurisdictions. It’s important to understand the nuances of income tax, including history, types, preparations for filings, and common mistakes to avoid for better financial management.