What Is The Total Tax A Person Or Business Has To Pay Called

The total tax that a person or business must pay is referred to as “total tax liability.” This term covers the entirety of taxes owed, including income, corporate, and other applicable taxes. It reflects the full financial obligation to tax authorities, crucial for ensuring compliance and effective financial management. Understanding this concept is key before diving into the specifics of how it is calculated and managed.

The total tax a person or business has to pay called: Tax liability

Total tax liability is the total tax a person or business has to pay. This encompasses all the taxes owed, which may include income tax and corporate tax, and other applicable taxes depending on the individual’s or business’s financial activities.

What Are Taxes? - Definition

Taxes are mandatory financial charges imposed by governments on individuals and businesses. Taxes can take many forms, such as income tax, sales tax, property tax, and corporate tax. In short, everyone is required to pay taxes to enjoy the benefits that the country provides. By understanding the various types of taxes and how they are applied, you and your business can better manage your finances and ensure compliance with legal requirements.

Understanding Taxes

Understanding taxes, both individual and business obligations, can help you strategically plan for the future. This is important because taxes impact nearly every aspect of your financial life, from how much income you take home to the profitability of your business. By staying informed about the different types of taxes—such as income tax, payroll tax, and corporate tax—you can optimize your financial strategies, take advantage of potential deductions and credits, and ensure compliance with the law. Proper tax planning allows you to minimize liabilities, maximize benefits, and avoid costly penalties, thereby securing your financial stability and growth.

Common Types of taxes

Understanding the common types of taxes help individuals and businesses understand their obligations to stay compliant with regulations. Next, we will deep dive into some of the most common types of taxes that you will encounter as an individual and as a business. 

Income tax

Income tax is a mandatory financial charge imposed on individuals and businesses based on their income. The federal income tax system is progressive, meaning that the tax rate increases as the taxable income increases. This system is designed to ensure that those with higher incomes pay a larger percentage of their earnings in taxes. The Internal Revenue Service (IRS) oversees the collection of these taxes, which are a primary source of revenue for the federal government. Most states also impose their own income taxes, which may be structured similarly to the federal system. 

Payroll tax

The payroll tax rates for Social Security and Medicare in the U.S. are determined by the Federal Insurance Contributions Act (FICA). For 2024, the Social Security tax rate is 6.2% for both the employee and employer, making it a total of 12.4%. However, this tax is only applicable to earnings up to $168,600, which is known as the Social Security wage base limit.

For Medicare, the tax rate is 1.45% for both the employee and employer, totaling 2.9%. Unlike Social Security, there is no wage base limit for Medicare tax, meaning it applies to all earnings. Additionally, employees who earn more than $200,000 in a year are subject to an extra 0.9% Medicare tax, which is only paid by the employee.

These figures and regulations are outlined in the IRS’s official publications, specifically in Publication 15 (Circular E), Employer’s Tax Guide for 2024

Corporate tax

In the United States, the corporate income tax rate is currently set at a flat rate of 21%. This rate was established by the Tax Cuts and Jobs Act (TCJA) of 2017, which reduced the previous top marginal corporate tax rate from 35% to 21% to make the U.S. tax system more competitive internationally.

Additionally, there is a new Corporate Alternative Minimum Tax (CAMT) introduced by the Inflation Reduction Act of 2022, which applies to certain large corporations based on their adjusted financial statement income. The CAMT is designed to ensure that large corporations pay at least a minimum level of tax, even if they can reduce their regular tax liability through deductions and credits.

These details are outlined by the Internal Revenue Service (IRS) and are part of the broader efforts to streamline corporate taxation and ensure fairness across different types of businesses.

Sales tax

Sales tax is a critical revenue source for states, and its application can be complex due to varying regulations across jurisdictions. As we move through 2024, businesses must navigate updates in sales tax laws, including shifts in what goods and services are taxable. For example, some states are beginning to tax digital products, which were previously exempt. Additionally, the rise of marketplace facilitator laws has complicated compliance, requiring more accurate record-keeping and reporting. Staying informed about these changes and leveraging a tax professional’s expertise can help businesses remain compliant while minimizing administrative burdens.

Property tax

Property taxes are a crucial funding source for local governments, contributing significantly to public services like schools, infrastructure, and emergency services. In 2024, property tax rates and bills continue to vary widely across the United States, influenced by factors like local government budgets, property values, and state tax policies. However, rising property taxes can strain both homeowners and small businesses, leading to economic challenges and potential decreases in property values if the tax burden becomes excessive. 

Tariff

Tariffs are a key tool used by governments to regulate trade, often imposed to protect domestic industries from foreign competition or to respond to unfair trade practices. In 2024, the U.S. government continued to adjust tariffs, particularly under Section 301 of the Trade Act of 1974, targeting various imports from countries like China. These tariffs, which can be as high as 100% for certain goods. The sectors most affected include steel, aluminum, semiconductors, electric vehicles, and solar panels. These measures are part of a broader strategy to strengthen American manufacturing and protect jobs in key industries. Understanding tariff on certain imported goods and services can help you and your business navigate the complexities of tariff more effectively to reduce your liabilities. 

Estate tax

The estate tax is a federal tax on inherited assets exceeding $13.61 million in 2024. Only the portion above this threshold is taxed, with rates up to 40%. Estate planning, including trusts and lifetime gifts, can minimize tax liabilities. With the exemption set to drop in 2026, proactive planning is essential to protect your wealth for future generations

Tax Delinquency

Tax delinquency occurs when individuals or businesses fail to pay their taxes on time, leading to penalties and interest. The IRS imposes a Failure to File Penalty of 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%. If taxes remain unpaid after five months, the penalty caps out, but the Failure to Pay Penalty continues to accrue until the tax is settled, also up to 25% of the unpaid balance. To avoid these penalties, it’s crucial to file and pay taxes promptly or seek an installment plan if payment in full is not possible. 

Why Do We Pay Taxes?

By collecting taxes, governments ensure they have the necessary revenue to provide essential services like education, healthcare, and national defense, thereby contributing to the overall functioning and welfare of the country. 

Who Needs to Pay Taxes?

In the U.S., nearly everyone is required to pay taxes. Individuals who earn income, whether through employment, investments, or other sources, must report and pay taxes on their earnings. This includes U.S. citizens, resident aliens, and in some cases, non-resident aliens who receive income from U.S. sources. Additionally, businesses, both large and small, are required to pay taxes on their profits. Certain exceptions apply, such as individuals whose income is below a specific threshold, which may exempt them from filing a tax return. If you are unsure, it is best to consult with a tax professional to determine whether you are required to pay taxes. 

Need tax services?

Need tax services? KenwoodPC is here to help. Our firm specializes in providing comprehensive tax solutions tailored to your unique needs, whether you are an individual, a small business, or a large corporation. With years of experience in tax planning, preparation, filing and compliance, we ensure that you navigate the complexities of tax laws with ease. At KenwoodPC, we prioritize accuracy, efficiency, and personalized service, making sure you receive the maximum benefits while staying fully compliant with all regulations. Let us take the stress out of tax season—contact Kenwood PC today for expert assistance.

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