What Is Tax Liability?
When it comes to Taxes, all businesses and individuals are liable to pay them to the Federal, state, and local governments. But what is Tax Liability anyway?
Whether you are an individual or a business, you may be wondering what tax liabilities are, how they work, and how you can calculate them.
In this guide, we will explain everything you need to know about tax liabilities. So read on to find out how they apply to individuals and businesses.
What Is Tax Liability?
Tax Liability is the amount of tax you are liable to pay to the local, state, or Federal government at the end of every financial year. It is the money you owe as taxes to the tax authorities. A tax liability legally binds you to pay taxes and you have to calculate them when filling out a 1040 form.
However, not all people are liable to pay taxes. For instance, people within the low-income brackets are not taxed. Those paying federal income and payroll taxes are also not taxed separately.
To learn more about the types of tax liabilities and how they are calculated, read on.
Types of Tax Liabilities
There are many different types of tax liabilities. Some of the most common ones include:
1. Income Tax Liability
Businesses are subject to federal, state, and local income taxes that are levied on their income. Income tax liabilities are withheld by employers from the employee’s salaries. However, small business owners do not get any compensation unless they are incorporated.
What’s more, your income tax liability will also have an income tax on your business income. You can pay this liability by paying estimated taxes throughout the financial year.
2. Trade Tax Liability
As independent legal entities, trade companies are liable to pay taxes on their profits. They also have to pay corporate tax in addition to their income tax. What’s more, their C-Corp is taxed at a state corporate income tax rate and they must pay the state corporate tax.
However, if they are in a partnership or are a sole proprietorship, LLC, or S-Corporation, they can make use of pass-through taxation.
Pass-through taxation allows businesses to not pay businesses on a business level. Instead, the sales taxes are passed through to the business owners who are liable to pay personal income taxes.
3. Small Business Tax Liability
Small businesses are liable to pay taxes from various events, which include transactions that are tax-liable and paid business events. They are also subject to excise or Franchise tax liability which is often levied on small business owners.
4. Self-Employed Tax Liability
Self-employed individuals are liable to pay Medicare and Social Security taxes on their income. This self-employed tax covers both the Social Security and Medicare taxes for both the employer and the employee.
These taxes are subtracted from the wages of employees in FICA taxes. You can also pay an estimated tax payment for these taxes.
5. Property Tax Liability
Real estate owners are subject to a property tax which is payable to local governments. This tax depends on the value of your property and is usually reconsidered every year. You can calculate your property tax by multiplying your property’s market value by the annual tax rate.
6. Payroll Tax Liability
Payroll and employer taxes are paid to the IRS by employers in case they have employees. This constitutes the money you spend as an employer and the money that is withheld from the employee’s income.
How to Calculate Tax Liability?
You can calculate the federal taxes by using tax brackets. To calculate your tax liability, first determine your entity type.
If your business is a C corporation, you will be subject to double taxes at both shareholder and corporate levels. But if it’s not a C corporation, your tax rate will depend on your tax filing status and your taxable income.
Your tax liability is usually calculated by subtracting the tax deductions from your taxable income. By doing that, you get your gross tax liability. To calculate your total income tax liability, you will need to deduct any eligible tax credits from your gross tax liability.
How to Reduce Tax Liability?
There are many ways to reduce your tax liability, the most common ones being tax deductions and tax credits. Find out which tax deductions, credits, and allowances you are eligible for.
Here are some of the best ways you can reduce your tax liability:
1. Tax Credits and Deductions
Tax credits reduce the total amount of taxes you owe. Whereas tax deductions reduce your taxable income.
Some of these deductions and credits include business expenses, itemized deductions, healthcare deductions, education deductions, investment deductions, homeowner credits, family and dependent credits, healthcare credits, and family and dependent credits.
2. Retirement Fund Contributions
Retirement fund contributions can help you save and grow your retirement funds the way you plan them. You can also plan them in a way to reduce your tax liability. You just need to find out how much you want to be taxed in retirement by recording your income and withdrawals.
If you fall in a higher tax bracket right now, as compared to your future retirement tax bracket, you can reduce your total tax payments with a traditional IRA since taxes are deferred.
Conclusion
If you earn an income, you are subject to a tax liability. Your tax liability is the total amount of taxes you owe to the authorities. There are various types of tax liabilities.
You can calculate yours by determining your total income and then subtracting any eligible tax credits and deductions to get a taxable income. Next, refer to the tax brackets to find out how much you owe.
Cash In Minutes
- About Us
- Services
- Contact
- Apply Now
En Español
- Aplicacion
- localidades
- Contáctanos
- Nosotros
This post first appeared on Cash In Minutes | Get Cash Advance In Minutes, please read the originial post: here
