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By Numbers Blog

How to Calculate My Tax Liability as an Individual



Whether you like it or not, everyone has to pay taxes. Therefore, being able to calculate your tax liability is incredibly important. Your liability depends on several different factors. These include where you live, how much you earn, what you buy, and how many properties are under your name.

However, many people who aren’t familiar with accounting don’t know how to calculate their own tax liability. While it might seem slightly complex at first, calculating your tax liability as an individual is something you can do yourself in preparation for tax season. Here are the basics of that process, including examples.

What Is Tax Liability?

Tax liability refers to the amount of money an individual or an organization owes the government in taxes. Individuals and organizations both have to pay taxes at three levels: state, local, and federal. Organizations will pay taxes based on any sales they make, while individuals have to pay taxes based on their income.

When it comes to how much they owe in taxes, the value differs between individuals depending on their income. The more an individual earns, the higher their tax bracket. As a result, they’ll have to pay significantly more in taxes than those in a lower income bracket.

How To Calculate Tax Liability For Employed Individuals

Calculating tax liability for an individual that is employed is rather straightforward. All you need to do to calculate your tax liability is fill out a form 1040. Once you see the yearly tax tables, it becomes easy to fill out the form.

However, for individuals that are self-employed or are running a business, things are slightly more complex. That’s why so many people turn towards hiring an accountant or a CPA to find their tax liability.

With a little bit of knowledge, it’s possible for self-employed individuals and business owners to file their taxes by themselves.

How To Calculate Tax Liability For Business Owners?

Identifying how much federal income tax a business owes all starts with knowing the entity type. If the business is a C corporation, then it’s going to be taxed twice. C corporations have to pay taxes on both the corporate and shareholder level. The income tax rate is also flat and is currently 21%.

Things are slightly different for other business types. Their tax rates depend on the amount of income and the individual's filing status.

Calculating Gross Tax Liability

The formula that allows you to calculate the gross tax liability is actually quite simple. All you need to do is subtract your tax deductions from your taxable income. Then, the answer will be equal to the gross tax liability.

You can then use the gross liability and subtract any tax reductions that you qualify for, and the result will be your total income tax liability. It’s a simple enough formula to understand. However, before you begin implementing it, there are a few other things that are necessary.

Identifying Your Entity Type

There are multiple types of business entities out there. That’s why it can be easy for those new to calculating their tax liability to get confused. However, when it comes to calculating tax liability, there are only two important entity types.

The only slight difference arises when an entity is a C corporation, while the other business types all use the same method for calculating tax liability. C corporations are the only business entity that has to pay corporate income taxes.

If a business isn’t a C Corp, it’s known as a “flow-through” type. The name fits perfectly because the profit and losses flow through the business to the owners and shareholders. It is then the business owners and shareholders who will pay taxes according to their respective tax bracket.

When you aren’t aware of your business entity type, it’s a good idea to ask your accountant. If you don’t have an accountant and haven’t had any thoughts about business entity types, your business is most likely, a sole proprietorship.

How To Identify Tax Rate For Flow-Through Entity

To start crunching in the numbers to calculate your gross tax liability, the first step is identifying your tax rate. For these entities, your tax rate will depend on the amount of taxable income the business earns and your individual tax filing status.

The tax brackets for single individuals

Business Income ($)

Taxes

0-9,700

10% of taxable income

9,701-39,475

$970 + 12% of income >$9,700

39,476-84,200

$4,543.50 + 22% of income >$39,475

84,201-160,725

$14,382.50 + 24% of income >$84,200

160,7265-204,100

$32,748.50 + 32% of income >$160,725

204,101-510,300

$46,628.50 + 35% of income>$204,100

510,301+

$153,798.50 + 37% of income>$510,300

For married individuals

Business Income ($)

Taxes

0-19,400

10% of taxable income

19,401-78,950

$1,940 + 12% of income >$19,400

78,951-168,400

$9,086 + 22% of income >$78,950

168,401-321,450

$28,765 + 24% of income >$168,400

321,451-408,200

$65,497 + 32% of income >$321,450

408,201-612,350

$93,257 + 35% of income>$408,200

612,351+

$164,709.50 + 37% of income>$612,350

These tax brackets make it easy for individuals to identify their taxes owed depending on what tax bracket they fall under.

Take, for example, a single individual that earns a taxable business income of $150,00. They fall under the $84,201-$160,725 bracket. That means the total tax liability will be:

$14,382.50 + [24% of ($150,000 - $84,200)]

$30,174.5 is the total amount of tax the individual will owe!

How To Figure Out The Tax Rate For C Corporations

Under the Tax Cuts and Jobs Act, it’s become much more straightforward for C corporations to make tax calculations. Instead of worrying about the corporate tax rate schedule and its eight different tax brackets, C corporations only have to pay a flat 21% tax rate.

It essentially means that a C corporation will have to pay an income tax rate of 21%, no matter the amount of taxable business income it earns.

Double Taxation

The structure of the tax system means that C corporations are taxed twice. First, they have to pay taxes on the corporate level and then again at the shareholder level. As a result, not only will you pay taxes on the business’s income, you’ll also have to pay taxes on any dividends that you receive.

C corporations can avoid double taxation by incorporating themselves as an S corporation. Like other types of business entities, S corporations are also flow-through entities. As a result, their income isn’t taxed at a corporate level.

However, incorporating as an S corporation also has certain disadvantages, and these may potentially outweigh the tax savings. Therefore, it’s important to ask a CPA or an accountant before making any set decisions.

Reducing Tax Liability

It is possible for individuals to reduce their tax liability by taking advantage of tax breaks. Tax breaks include both tax credits and deductions.

When it comes to tax deductions, individuals can choose to add them all up or take a single standard deduction. The single lump sum deduction depends on the tax filing status. Single taxpayers have to pay $12,000, the heads of households have to pay $18,000, or $24,000 if they’re married and filing jointly.

Individuals with multiple deductions will choose to itemize all of them, while those with few deductions will lean toward claiming the standard deduction.

Employment Taxes

When you’re filing taxes as a business owner individually, you also need to consider employment taxes. Employment taxes occur on the wages the business pays to employees and the owners.

Even if an organization doesn’t have any employees, they’ll have to pay employment taxes. These taxes include:

Social Security Tax

Social security tax typically equals 12.4% of total wages paid up to $132,900! The business will pay half of this for each employee, and the other half is deducted from the employees’ wages.

Medicare Tax

The tax equals 2.9% of the wages paid to an employee, and there’s no wage cap. So once again, you’ll have to pay half of this amount for each employee and deduct the other half from their wages.

Federal Unemployment Tax

Generally, the federal unemployment tax or FUTA equals 6% of the first $7,000 of every employee’s wages. However, you can reduce the amount by contributing to the state’s unemployment fund. It’s possible to get an unemployment tax rate as low as 0.6%

While the employees will be paying some of the taxes, it is the business’s responsibility to withhold the taxes for the IRS. Even self-employed business owners have to pay a self-employment tax.

The self-employment tax is equal to the total amount of social security tax and Medicare tax liabilities, as when you’re self-employed, there’s no other employer that’ll pay your portion of taxes.

Conclusion

Now that you’ve got an idea of everything that goes into calculating your total tax liability, you will be much more equipped in planning your fiscal year. Even if you use a CPA or accountant, there is still great benefit in understanding where your liability comes from.

However, calculating the total tax liability is only the first part. The next step is actually paying the taxes.

Final Thoughts

If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.

If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!


FUTURE IMPORTANT DEADLINES


01/31/22

Deadline to distribute 1099's and W2's

03/15/22
Deadline for first-quarter estimated tax payments for the 2022 tax year

04/18/22

Deadline to file individual tax returns for 2022