A business must pay a variety of taxes based on the company’s physical location, ownership structure, and nature of the business. Business taxes can have a huge impact on the profitability of businesses and the amount of business investment.
Taxation is a very important factor in the financial investment decision-making process because a lower tax burden allows the company to lower prices or generate higher revenue, which can then be paid out in wages, salaries and/or dividends.
Business may be required to remit the following types of taxes:
Federal Income Tax
A tax levied by a national government on the annual income of individuals, corporations, trusts, and other legal entities. Federal income taxes apply to all forms of earnings that make up a taxpayer’s taxable income, such as employment earnings or capital gains. When the tax collected is credited to the government of the country’s account, it is referred to as a federal tax.
State and/or Local Income Tax
A tax levied by a state or local government on annual income. Not all states have implemented state-level income taxes. State income taxes have their own set of deductions and credits that may be awarded for certain activities. Taxpayers who itemized deductions on their federal returns may deduct state taxes paid.
A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, federal authorities, as well as many state governments, collect some form of payroll tax.
Governments use revenues from payroll taxes to fund programs such as Social Security, health care, unemployment compensation and workers compensation. Sometimes local governments collect a small payroll tax to maintain and improve local infrastructure and programs, including first responders, road maintenance, and parks and recreation.
A federal tax that is allocated to state unemployment agencies to fund unemployment assistance for laid-off workers. Unemployment compensation is meant to provide a source of income for jobless workers until they can find employment.
A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state. Sales tax is based on a percentage of the selling price of the goods and services and is set by the state.
Income taxes paid to a foreign government on income earned in a country. One of the itemized deductions that may be taken for taxes paid to a foreign government, which typically are classified as a tax withholding. The foreign tax deduction is usually taken in lieu of the foreign tax credit if the deduction is more advantageous to the taxpayer. In most cases, the foreign tax credit will provide greater benefits than the deduction.
A national sales tax collected at each stage of production or consumption of a good. Depending on the political climate, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax. The amount of VAT that the user pays is at the cost of the product, less any of the cost of materials used in the product that has already been taxed.
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