Tax liability refers to the money owed to the IRS or to state and local collection authorities. The liability could be a result of underpayment (or nonpayment) of taxes. Tax liability also results from ownership of a business, as well as from profits earned on the sale of real property or other assets. Some tax liabilities are on a pay-as-you-go basis, such as sales and excise taxes.
Income tax is the annual charge governments levy on both earned income (salaries, wages, commissions) and unearned income (interest, stock dividends, rent collections). According to the Tax Foundation, in 2017, the federal government collected nearly $4 trillion in income taxes from individuals, corporations, and through built-in excise taxes for goods and services.
In addition to federal income tax liability, 43 states impose a personal income tax on its residents. Income tax liability for California residents, for example, results in an additional 13.3% tax burden.
Depending on the type of business, a business owner must pay a tax on its profits. If the business is a C corporation, it has a tax double liability. Both the corporation and its shareholders are taxed at a flat rate of 21%—and the individuals still owe personal income taxes. If the business is not a C corporation, the tax liability “passes through” the corporation to the personal income tax rates paid by the individuals.
When you sell an investment, real property, or another asset for more than you originally paid for it, you have a tax liability. The tax liability for capital gains is usually lower than personal income tax rates, and only the gain in income on the asset is taxed.
The sales tax is a consumption tax on the retail purchase of goods and services. Retail business owners in the 45 states that impose a sales tax collect sales taxes based on a percentage of the sales amount. The retailer submits sales tax payments to the state and local collecting authorities.
If you’re looking for strategies to reduce your tax liability, let the tax professionals at Chandler & Knowles leverage their years of experience in dealing with the IRS. Contact us today and learn how you can keep more of the money you earn. Let our professional team earn your next tax return business!