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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