A Comparison Between Corporate and Individual Tax Formulas in the US

Dealing with tax formula issues is one of the most critical accounting tasks for freelancers or small business owners. Having a proper understanding of your tax liabilities will help you evaluate your business’s financial position, a key factor in business management. 

This article will help you clarify the tax formula between corporate and individuals. Let’s read on! 

In brief, corporate tax is an expense of a business levied by the government that represents a country’s primary source of income. In contrast, personal income tax is a governmentally imposed tax on an individual’s income, such as wages and salaries. It’s vital to remember that company tax is not the same as tax levied on an individual’s income.

What is the corporate tax formula?

Corporate tax is a direct tax paid to the state by corporations on their revenues. Tax revenue serves as a country’s critical source of income and is used to produce various programs for the advantage of its population. It also allows investment in business development and capital augmentation. 

A corporation is an independent legal organization with its own tax liabilities. The corporation’s profit comes from various areas, including sales revenue, capital gains, commissions, interest, and dividends. This profit is subject to a company tax levied by the government.

Corporate taxation is applied to the following types of businesses:

  • All companies established in the country (small, medium, and large)
  • Corporations that conduct business within the country
  • International companies with a longstanding presence in the region
  • Corporation owners that are resident aliens

Presently, the US lays a flat 21% corporation tax on listed corporations’ taxable income. The corporate tax rate in the US decreased from 35% to 21% in 2017. Globally, the corporate tax rate is revised every year. The revisions are commonly based on corporations’ financial situation and economic growth. In general, corporations pay 25.89% of local, state, and federal taxes.

Here is the corporate tax formula: 

Corporate tax = Taxable Income x Corporate Tax Rate 

Taxable Income = Adjusted Gross Income – All Applicable Deductions

According to the IRS, the Adjusted Gross Income (AGI) is calculated by the difference between gross income (e.g., wages, dividends, capital gains, business income, retirement distributions, etc.) and adjustments to income (e.g., educator expenses, student loan interest, alimony payments or contributions to a retirement plan). The total income is the annual revenue from product sales, commissions, interest, rent, and other factors. Applicable business deductions include early repayment fines, vehicle expenses, operating expenses, and other company expenses.

What is the personal tax formula?

The government levies a personal income tax on an individual’s income. In other words, an employee’s earnings are subject to income tax.

In particular, the following entities are subject to personal income tax:

  • Individuals working by themselves
  • Employees that work full-time for a company

Most people do not pay the total amount of income tax due to tax allowances, deductions, and credits. The IRS allows several deductions, such as healthcare and education expenses, for taxpayers to lower their taxable income.

Since 2012, there are seven federal tax brackets in the US: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your tax bracket is determined by your filing status and taxable income (such as wages.)

Here is the personal tax formula: 

Personal tax = Taxable Income x Personal Tax Bracket

Taxable income = Adjusted Gross Income – All Applicable Deductions

The bottom line

In closing, understanding different types of tax formulas gives you an overview of your tax liabilities and helps you take greater control of your finances. What’s more, you can get ready for tax season, file your tax returns correctly, avoid tax penalties, and make the most out of your eligible deductions. 

If you’d like to explore more about the US tax system, we encourage you to subscribe to the Shoeboxed blog. You can also check out our previous articles about business taxes and helpful tax tips: 

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Business Finance 101: Your Complete Guide to Different Types of Taxes in the US

As there are many types of taxes in the US, you might know which taxes you have to pay personally, but things are much more complicated when you file your business taxes. 

If paying taxes has the potential to cause you a lot of headaches, you may want to change your approach. That could mean enhancing your knowledge about taxes, starting filing your taxes earlier, using professional tax solutions, or consulting with a financial advisor. 

In this article, we’ll cover the most common types of taxes in the US and the specific taxes in each category. Let’s find out! 

The most important types of taxes in the US for businesses

Different companies pay different types of taxes because it depends on their products and services. However, most types of taxes in the US fall into three main categories: what you earn, what you buy, and what you own. 

Taxes on what you earn

  • Income tax (individual income taxes, corporate income taxes)

Income tax is a direct tax that a business pays based on its income or profit during the year. Though every state of the US imposes a business (also called corporate) income tax, the tax rates differ from state to state.

Partnerships don’t have to pay income taxes. However, they must file an annual information return to report income, gains, losses, and other important tax information.

  • Employment tax

Employment taxes are levied on employees’ wages and salaries to fund social insurance programs. In the US, the largest employment taxes are a 12.4 percent tax to fund social security and a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of the employment taxes (7.65 percent) are remitted directly by employers, with the other half withheld from employees’ paychecks. Employment tax also covers employees’ federal income tax withholding and federal unemployment (FUTA) tax.

  • Self-employment tax

Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. Your SE tax contributions ensure your coverage under the social security system. This package includes retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

In general, you must pay SE tax and file Schedule SE (Form 1040 or Form 1040-SR) if either of the following situations applies.

  • You made $400 or more in net self-employment earnings.
  • You work for a church or a qualified church-controlled organization that elected an exemption from social security and Medicare taxes, and you receive $108.28 or more in wages from the church or organization.
  • Estimated tax

Estimated tax is a quarterly payment of taxes for the year based on the filer’s reported income for the period. This type of tax usually applies to small business owners, freelancers, independent contractors, sole proprietors, partners, and S corporation shareholders, those who do not have taxes automatically withheld from their paychecks as regular employees do.

You can calculate your estimated tax based on Form 1040-ES’s worksheet. You’ll need to estimate how much money you plan to make this year. If you overestimated your earnings, you can recalculate your estimated tax for the next quarter using a new Form 1040-ES. You need to estimate your income as accurately as possible to avoid penalties. 

Taxes on what you buy 

  • Sales and use tax

Some states charge sales tax on goods and services. However, there are some exceptions, such as if your business sells clothing, medicine, food, etc. Sales tax is a consumable tax that applies to retail sales, leases, and rentals of certain tangible personal property and services. Use tax applies when you buy tangible personal property and services from other states.

  • Gross receipts tax

Gross receipts taxes (GRTs) might look like sales taxes, but they actually tax the sellers rather than the retail buyers. This tax is a state tax applied to a business’ gross receipts (sales) regardless of profitability and without deductions for business expenses. Gross receipts tax is sometimes imposed instead of a corporate income tax or a sales tax.

Because gross receipts taxes are imposed at each stage in the production chain, they result in “tax pyramiding,” The tax burden multiplies throughout the production chain and is eventually passed on to consumers.

Gross receipts taxes are particularly destructive to startups and businesses with long production chains, which often lose money in their early years. Despite being dismissed for decades as a wasteful and unsound tax policy, politicians have recently reintroduced GRTs as a source of additional revenue. 

  • Excise tax

An excise tax, (or a sin tax), applies to goods and services that are regarded as harmful to people or the environment, like tobacco, alcohol, and fuel. If you’re doing business in this field, you have to collect and pay excise tax to the relevant federal and state authorities. The Internal Revenue Service (IRS) and the Alcohol and Tobacco Tax and Trade Bureau (ATFTB) are the two federal agencies that control excise taxes (TTB).

Taxes on what you own

  • Property tax

This type of tax, which is generally levied on immovable properties such as land and buildings, is an important source of revenue for state and municipal governments across the United States. Property tax supports local governments in funding public services (e.g., schools, roads, police and fire departments, and emergency medical services.)

However, the property tax is different in each state. Some states collect property tax from businesses in commercial real estate locations, while others collect “tangible personal property tax,” such as vehicles and equipment owned by businesses.

Overall, taxes on real property are relatively stable, neutral, and transparent, whereas taxes on tangible personal property are more problematic.

  • Franchise tax

A franchise tax is a government levy (tax) that some US states apply to certain business organizations such as corporations and partnerships that do business in another state. A franchise tax doesn’t depend on income but the tax rules within each state, with some calculating the company’s assets, net worth, or capital stock. 

What happens if you don’t pay your business taxes on time

Taxes are a serious matter that every business owner needs to pay close attention to. You must file tax returns on the IRS’s Form 1120, even if you believe that there are no owed taxes. Otherwise, you could be subject to late-filing and late-payment penalties and even have to pay interest. In this case, you could encounter a minimum penalty ranging from $135 to $205 or the amount of tax owed, whichever is smaller.

You may also be unable to claim the company’s net operating loss on your tax return since it must be recorded on Form 1120, which it will not be if you do not file taxes.

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How Shoeboxed can help you prepare for tax season

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3 Ways to Pay Your Taxes to Uncle Sam

You’ve finished filing your taxes, and all that’s left is to pay your taxes to Uncle Sam. Here are several simple and fast ways you can pay your tax obligations, courtesy of our friends at GoDaddy Online Bookkeeping.

This post is brought to you by GoDaddy Online Bookkeeping (formerly Outright) the simplest way to manage your small business finances online. Sign up today for a less taxing tax time! 

Well, there’s good news and bad news. The good news is you finished filing your taxes and you can move on with the rest of your life. The bad news is you owe money instead of getting a nice refund.

This is bad on two levels; one, you owe money, and two, it’s notoriously difficult to pay to the IRS. There’s a huge rigmarole to go through and you’re pretty sure you have to sign over your first-born. The IRS never makes things easy, right?

Actually this time you couldn’t be more wrong. There are several simple and fast ways you can pay your tax obligations. 

1. EFTPS

This is by far the easiest and best way to pay your taxes. The Electronic Federal Tax Payment System is actually set up by the IRS as a secure and easy way to pay. Best of all, the system lets you set up payments on a regular basis for not only your federal taxes but also for things like your quarterly estimated taxes.

All you have to do is enter some basic info in the link provided above after clicking Enroll. This also involves entering your bank info so money can be instantly transferred. Now you can pay all you owe or set up payments to automatically come out. It honestly doesn’t get much easier.

Here’s a step-by-step guide to setting up EFTPS.

2. Credit Card

 So you don’t want to set up a profile at EFTPS, as you expect to only pay the once. No problem! You can actually pay with a credit card as a one-time payment. If you have a payment that’s small enough you can immediately afford it, go for it.

However, there is one little issue: fees. You see, the IRS doesn’t take credit cards, payment processors do. These processors come with varying fees you’ll have to shell out in order to pay off your tax obligations. Luckily they’re generally only a couple bucks, though, although if you have a substantial tax bill you may end up paying a big chunk in fees, too.

 3. Payment Plan

Can’t pay it all at once and don’t want to set up a profile on the EFTPS? Then you need a payment plan, which is surprisingly easy to get. Simply submit Form 9465 (also Form 433-F if you owe more than $50,000) and you’ll have a payment plan ready to go.

The money will simply deduct from your account every month on whatever date you decide. Also, because the IRS wants their money, the payment plans are generally approved without a hitch. After you submit the form you should get notice back in a few weeks. The payments will then continue through when you’ve successfully paid everything off.

One thing to keep in mind is next year if you incur more tax obligations you must submit a new payment plan. The new total isn’t added to the payment plan automatically and assuming it will might land you in hot water. Just be sure to send in a new Form 9465 to create a brand new plan.

How do you pay the IRS?