By law, but with a lot of different perks dependent on the country one pays its taxes, businesses and individuals must file federal and state income tax returns every year to determine whether they owe taxes.
Its two basic types are:
- Personal income tax, levied on incomes of individuals, households, partnerships, and sole-proprietorships; and
- Corporation income tax, levied on profits (net earnings) of incorporated firms.
However, presence of tax loopholes (whose number increases in direct proportion to the complexity of tax code) may allow some wealthy persons to escape higher taxes without violating the letter of the tax laws. For persons paying their personal income tax in many situations part or whole of the tax liable has already been withheld from their monthly pay check as wage taxes.
Not all types of income are taxes with income tax. Personal income tax is paid on things like:
- money earned from employment in a job/several jobs,
- profits made as a self-employed worker in business – including from services sold through websites or apps
- some state benefits,
- most pensions, including state pensions, company and personal pensions and retirement annuities,
- rental income,
- income from a trust,
- interest on savings over a savings allowance.
Note that each country has its own tax system with many very detailed exemptions, imputed income or expense items and all sorts of other features.
Corporate income tax
An assessment levied by a government on the profits of a company. The rate of corporate income tax paid by a business varies between countries, although since corporations are legal entities distinct from their owners and operators, they are typically taxed as if they were people.
Personal income tax
Tax paid on one’s personal income as distinct from the tax paid on the firm’s earnings. In an incorporated firm, the owners (shareholders) pay taxes on both their income (salary or dividend from the firm) firm’s income (profits). In partnerships and sole-ownerships, the tax is paid only once on the firm’s profits.
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