The IRS Solution To Tax Liability
Having a full understanding of the basic underpinnings of your taxes gives you the opportunity to develop better financial literacy. In this regard, you can more precisely expect what taxes you will owe at the end of the year, instead of being met with an unpleasant shock in the form of a momentous tax bill when it’s time to file. Your
tax liability, in its most basic definition, is the tax amount you owe to the IRS at the close of a given tax year.
Your full
tax liability is affected by a variety of factors and the filing process changes if you’re filing as an individual or a business. The
tax liability you may be most familiar with is your individual income tax, but there are several kinds of liabilities that may impact what money you owe.
What is Tax Liability?
Your tax liability is the total amount of taxes you owe to the IRS at the end of the tax year and applies to both individuals and businesses. Tax liabilities accumulate when you earn income, or another kind of “taxable event” occurs, like issuing payroll or selling off your stock holdings for a profit.
Tax liabilities are usually created by you regular wage earnings for a job. In most cases, employers withhold portions of wages so as to cover an individual’s liabilities. But if the amount withheld doesn’t cover your total liability for the year, you are needed to make up the difference by paying the remainder. On the other hand, if the amount withheld exceeds your total tax liability, you get a tax refund. If you don’t have a tax liability at all, that means your total tax was zero the previous year or, you didn’t need to file a tax return.
Types of Tax Liabilities
Taxes are forced on a federal, state, and local level and help to pay for public projects like rebuilding infrastructure and funding public programs. There are a variety of tax liabilities that may apply to your personal or company tax situation. It’s significant to understand which may apply to you, so you can better anticipate your final tax bill.
Sales Tax Liability
Sales tax is a regular type of tax liability you’ve likely paid for when shopping. When a company sells a product or service, many state and local governments charge a sales tax. A sales tax is a percentage of each sale, paid by the consumer. Businesses must remit sales taxes to tax authorities on a quarterly or monthly basis.
Payroll Tax Liability
If you have a company and employ workers, you must withhold, file, and send in payroll taxes. In addition, you must also remit employer taxes. The amount you hold back from employees plus the money you spend as the employer determine the payroll taxes you owe.
Taxes that require to be withheld include income taxes (federal, state, and local), FICA taxes, and federal and state unemployment taxes. As a note, FICA taxes make up what employers put in Social Security tax and Medicare tax, which is imposed on employee income.
Back Taxes Liability
An individual or company’s tax liability isn’t restricted to the present year. Rather, it includes all the years for which taxes are still owed. For example,
if you owe back taxes, those are added to your total tax liability.
Property Tax Liability
If you possess property, you’ll be accountable for paying a
property tax to your local government. These taxes vary based on location and the rates are reassessed every year.
Capital Gains Tax Liability
If you have an investment like stocks or real estate but sell it at a profit, you’ll need to pay taxes on the profits. For example, let’s say you bought a stock for $7,000 and after three years, you sell it at its accrued value for $14,000. In this instance, you would be required to pay taxes on that $7,000 profit.
It’s significant to note that the tax rate for capitals gains may be different from other tax calculations. If you’re not sure, it’s best to consult a tax professional steeped in this particular kind of tax knowledge.
Self-Employment Tax Liability
As state initially, employers are responsible for withholding certain amounts of income to cover the employees’ tax liabilities. But what happens if you’re your own employer? If you’re self-employed, you’re responsible for paying for your taxes on income that would normally be withheld by your employers. Self-employed workers pay a self-employment tax that covers your Social Security and Medicare taxes.
A self-employment tax liability is equivalent to 15.3% of your net income. You can pay your self-employment taxes through probable tax payments all through the year, however. This helps you avoid a big tax bill at the end of the year.
What is Deferred Tax Liability?
If you own a business, you might be on the hook for another kind of tax liability: deferred tax liability. So, what is deferred tax liability?
Deferred tax liability, also known as DTL, refers to the tax owed by a business that has not yet been resolved or paid. In most cases, this occurs because of the difference between business accounting methods and tax structures.
For example, let’s say your business uses accrual-based accounting, like most companies do. If that’s the case, then you might have revenue that’s been billed during the present tax year, but your company doesn’t actually get those earnings until the next tax year.
The IRS’ resolution to this is to allow companies to defer their taxes to the time when those anticipated earnings are actually obtained. The reasons why a business may have a deferred tax liability include:
· Assets depreciating in value, so there is dissimilarity between accounting earnings and taxable earnings.
· Credit sales that result in a later revenue-earning date
· Installment sales, which lead to sales revenue that is billed, but not yet earned
DTL impacts your business because it forces you to reflect on how each expense and kind of income affects your company’s overall financial standing. DTL is a tax debt you are still required to pay at a future date, so it’s serious to plan for these expenses to ensure your books are balanced.
It’s important to note that DTL isn’t necessarily a bad thing and it doesn’t mean you didn’t pay enough taxes; it’s just one factor you’ll need to consider when you’re actively managing your business finances.
For example, perhaps you predict you’re going to owe deferred taxes. In that case, it’s a good idea to start paying down other debts to offset both your assets and liabilities. Doing so will help set your business up for the chance of growth, rather than going down a potential path of bankruptcy if you fail to take deferred tax liabilities into account properly.
But bear in mind, when you’re calculating what deferred taxes you owe; ensure that you verify the current tax and depreciation rates that apply to your company. If the tax rate rises, your DTL should show that. In terms of your business accounting, that means you’ll need to budget more money in the future to balance out the increased liabilities on the books.
If you don’t have a business accountant but you want your taxes to be exact, hiring a professional is an important step. Knowing your income, revenue, liabilities, and assets is a huge part of understanding your company’s financial big picture. Small business accounting services can help you better trail your company’s finances and keep track of your tax LIABILITY.