Individual and Corporate Taxes
Every individual living in the United States must abide by the federal government’s income tax requirements. Income tax is a form of government tariff that is imposed on the profits, or income, made by both individuals and other entities, such as corporations. In the United States, income tax is authorized by the Sixteenth Amendment to the United States Constitution, which authorizes Congress to tax “incomes from whatever sources derived.” Income tax rules are largely derived from the Internal Revenue Code and are notorious for their convoluted and unintuitive nature.
Personal Income Tax Requirements
By law, individuals who work for an employer will have income taxes taken out of their paycheck every period. The exact amount taken out is based on an individual’s income bracket, or their yearly salary, and a corresponding income tax percentage. This percentage increases as one’s income grows. For individuals who are self-employed or employed in non-traditional means, income tax must still be paid, but it is the responsibility of the individual to calculate and pay such taxes, often on a quarterly or yearly basis. Often times, self-employed individuals will pay estimated taxes ahead of schedule to cover what is owed in income taxes, and will receive reimbursement at the end of the year to the extent that they have overpaid.
Verifying Income Tax Payment
Every April 15, individuals across the United States are required to file a personal income tax return, which serves to determine and report gross income for the previous year and total taxes owed. If an individual has paid more in income taxes throughout the year than are actually owed, she will receive a refund. If she has not paid enough, she will be required to pay any amounts still outstanding.
Calculating actual gross income, adjusted income, and taxes due can be a very complicated process, as anyone who has completed a tax return can tell you. Taxable income includes not only wages received from a job, but also dividends, rental income, unemployment benefits, capital gains, and many other monetary benefits an individual has received. However, before arriving at a gross income figure, individuals may also claim certain deductions, which reduce their overall income. These deductions are generally allowed for purposes that the government has determined further an overall good, such as deductions for necessary medical expenses, school tuition, or mortgage interest payments. Similarly, individuals may also qualify for tax credits that reduce overall tax owed to the government.
Failure to Pay Income Taxes
In most situations, an individual will be required to pay income taxes every year and file a tax return. In certain situations, such as while in school, an individual’s income may be so low that at return is not required. However, if an individual who is required to file a return fails to do so, stiff penalties can be imposed. If you fail to file a timely return, or to file a return at all, you may be subject to penalties and additional costs for late filing. If over six years have elapsed and a return still has not been filed, you may also be subject to criminal charges by the IRS, or find that garnishments are taken from your wages or government benefits to pay for overdue taxes. In an effort to avoid non-filing of a return, the government does allow individuals to seek extensions for filing. However, it is important to note that while these extensions give you more time to complete your return, they do not extend the time that you have to pay outstanding income tax.
Business taxes can affect all different kinds of commercial entities, ranging from corporations to limited liability companies (LLCs), partnerships, not-for profit entities, sole proprietorships, and more. The exact tax structure that is applied depends on the nature of the entity itself. Generally, corporations, like individuals, must pay taxes on the net income or profit they receive from the work that they do. Meanwhile, the profits from other types of businesses pass through to the owners of those businesses, who must report them on their personal returns together with any other taxable income that they earned.
Corporations and other businesses often have the benefit of a great deal of tax deductions that can greatly reduce their overall taxable income. Indeed, business tax deductions are so expansive that it is often worth investing in the advice of a qualified tax advisor who can help the owners or managers of a business sift through all the available tax deductions that may be available to them. Common sources include:
- Medical and retirement plans for employees
- Salaries and bonuses
- Startup costs
- Advertising costs
- Other legitimate and necessary business expenses
Corporations pay their corporate taxes via Form 1120. Additionally, unlike many individuals, corporations are often required to pay estimated tax payments on a quarterly basis in order to avoid a high tax bill at the end of the year.
Unique Forms of Corporate Taxation
In addition to paying taxes on net income or profits, corporations must also pay taxes on other means that they use to distribute income to their shareholders and owners. For instance, many corporate owners receive a portion of their payments in the form of salaries and bonuses when they perform functions on behalf of the corporation. When this happens, these payments must also be reported as personal income sources for the owners and are subject to personal income taxes.
Likewise, where corporations distribute income in the form of dividends to corporate owners, these dividends must also be reported as income. Moreover, unlike salaries and bonuses, which can be deducted as business expenses, dividends must be reported by the corporation, and corporate taxes must be paid. Thus, dividends are a unique form of income that is subject to double taxation, at both the corporate and personal levels.