Tax Liability: What is it and how do you calculate it?

While tax liability may mean the same thing for every individual, corporation, or entity, the amount payable to tax authorities is different. If you run a small-scale business, work for a company or run a big firm, how can you calculate your tax liability?

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What is Tax Liability?

Tax liability is the total tax debt an individual, business, or entity owes to taxing authorities. Tax liability is incurred through earnings; a company making sales, an individual with an income, sales of an asset, and other taxable events. 

Tax liability varies in the amount owed by each entity base on the current tax laws. The tax liability of a company is not the same as that of individuals with wages or salaries. An individual may pay taxes on particular or multiple sources of income while a company pays sales tax on each unit of product sold. 

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How to Calculate Your Tax Liability

There's no doubt that knowing your tax liability is important, but how do you calculate it? Tax liability varies for each type of business.

A sole proprietorship, LLC, partnership, and S-corporation are taxed based on profits. As for the C corporation, the usual federal tax of 21% is charged unlike the varying nature of the profit-based business types. Hence, no matter the amount a C-corp has as taxable income, the tax rate is a static 21%. The reason for this is that shareholders of the corporation still pay taxes individually.

To further emphasize this; after a C-corp is taxed at the business level, shareholders of the business get taxed individually for the income received. Now, to evade this type of taxation, many businesses choose the S corporation instead of C. 

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Here's how to calculate your tax liability:

Income Estimation

Income estimation takes out the surprise, and most importantly gives you an estimate of what to expect for your tax liability. For convenience, calculate your quarterly income. Quarterly income may vary slightly, yet, by adjusting the figures for each quarter, either increase or decrease - the estimate is feasible.

Tax Deductible Estimation

This estimation is also possible quarterly. Based on your estimated total income, remove the tax deductions from it. This leaves the taxable income for a quarter. Do the same calculation for each quarter if differences in income vary. 

For individual tax, a graduated tax system is used, and this affects how you get taxed. A certain part of the taxable income is taxed at a rate based on the income level. An example of such is taxpayers with spouses filling tax jointly. The Knowledge of your tax deductibles allows you to calculate the taxable income for each quarter.

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Tax Payment

By knowing your quarter and estimated yearly tax, you can split the yearly tax estimate into each quarter. If calculated well, you will have no tax liability at the end of the year.

Below is the tax bracket for single and married taxpayers. It includes the graduated tax for each income level. 

For Single Filers

For Married Filers

Additional Types of Tax Liability

Self-Employment Tax Liability

Self-employment tax comes with a deductible percentage on the tax charged. It means a self-employment taxable income of $50,000 will be taxed 7650 at the rate of 15.3%, yet half of the 7650 is considered deductible.

Sales Tax Liability

A business is responsible for sales tax liability on the product it sells in the vicinity of the business location. However, sales tax is charged from the point of purchase from customers who buy the products. The tax you charge customers as they make purchases offsets the sales tax liability.

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Payroll Tax Liability

The income tax charged on employees and withheld from their paychecks and FICA amounts to payroll tax liability. It includes federal and state unemployment taxes. To accurately calculate and reduce tax liability, keep track of business expenses.

A good record of expenses enables you to note all tax deduction avenues. Penalties and interest pile up fast thereby adding to tax liability. Timely tax payment prevents fines from the IRS. And tax liability won't rise to a point where it's difficult to pay up.