As a business owner, it’s important to know the basics of tax. In addition to running the business, you’re responsible for ensuring that both state and federal taxes are properly paid out.
We previously covered the common terms of tax. Today we’ve decided to focus on an essential topic: gross income versus taxable income, and the difference between the two.
We think you’ll find that it’s going to go a long way in helping you to grasp the tax and finance aspects of your company and keep your finances in check.
Gross income is your income before taxes and deductions are removed. It is not just from your wages and can come in other forms that are subject to taxation including rental income, dividends, bonuses, business income, gain from the sale of stock or property, and other sources.
All income is taxable unless the law states that it’s not. Some good examples of things that are not taxable under the Internal Revenue Code (IRC) include gifts and inheritance, scholarships, life insurance proceeds, and most disability income.
Deductions are business expenses or deductions, and personal deductions such as state income taxes, mortgage interest, charitable contributions, student loan interest, etc.
Taxable income is the portion of your gross income on which you’re required to pay income taxes. Generally speaking, an amount included in your income is taxable unless it is specifically exempt by law. Taxable income must be reported on your return, and it is subject to tax.
Here’s the golden rule:
Gross income – deductions = taxable income
This means that your taxable income is your gross income minus all of the deductions allowed.
When you file your federal and state income tax forms, you’ll use your gross income as your starting point and then subtract deductions to deWtermine how much you’ll owe.
Your taxable income is also known as adjusted gross income (AGI), and after calculating this you’ll decide whether to take the standard deduction or itemize your taxable deductible expenses.
Here in the US, we have a "worldwide" or "citizenship-based" individual tax system. Any income earned by US citizens or permanent residents (in other words green card holders) is taxed by the US government, no matter where it is earned.
Taxes paid to other countries may be credited against US taxes.
When it comes to tax rates, these will be different for ‘individuals’ and those who are ‘married filing jointly’. Also worth noting is that state income tax differs in every state, with some having a progressive system, others a flat tax, and a few with no state income tax.
To run a business that thrives, you'll need to optimize your business income, maximize deductions and credits, and minimize self-employment taxes. Our clients in the Tampa Bay area depend on us for this expertise. When you need an expert to guide you through the financial maze and toward success, we are here to help.
We have expert knowledge and vast experience in business tax management, accountancy services, financial statement preparation, and financial advice.