Corporate vs Personal Income Tax

Learn more about the two types of income tax

What is Corporate vs Personal Income Tax?

In this article, we will discuss corporate vs personal income tax. Corporate tax is an expense of a business (cash outflow) levied by the government that represents a country’s main source of income, whereas personal income tax is a type of tax governmentally imposed on an individual’s income, such as wages and salaries.

 

Corporate vs Personal Income Tax

 

 

Quick Summary

  • Corporate tax is a direct tax paid by businesses to the government on their earnings. The funds collected from the taxes serve as a country’s source of income and are directed to financing various projects for the benefit of its citizens.
  • The maximum corporate tax rate equal to 35%.
  • Personal income tax is a direct tax paid by individuals to the government on their personal income coming from monthly salaries and wages.

 

What is Corporate Tax?

Corporate tax, also called company tax or corporation tax, is a direct tax levied on a company’s income or capital by the government.

Corporate taxation is a difficult aspect in a country’s jurisdiction, and rules around it vary a lot from country to country. Some countries are considered to be tax havens, such as Curacao, Fiji, Cyprus, etc., and are very valued by corporations due to soft tax policies in such areas.

Corporate taxes are subtracted from the earnings before tax figure in a company’s income statement to arrive at net income (net profit) generated for a particular period.

The maximum corporate tax rate is equal to 35%.

 

What Does Corporate Tax Apply To?

Corporate taxes apply to the following institutions:

  • All corporations originated in the country (small, medium, and large)
  • Corporations running a business inside the country
  • Foreign enterprises with a permanent establishment in the country
  • Corporations that are residents for tax purposes inside the country

 

What is Personal Income Tax?

Personal income tax is a tax imposed by a government on an individual’s income. In other words, the income tax is payable on an employee’s wages and salaries.

Most individuals do not pay the individual income tax on the full amount of income due to tax exemptions, deductions, and credits. A series of deductions is offered by the U.S. Internal Revenue Service, e.g., deductions for healthcare and education expenses, which taxpayers benefit from to reduce their taxable income.

Imagine an individual who earns $200,000 in income and is qualified for $30,000 of tax deductions. In such a case, the taxable income will be reduced to $170,000 ($200,000 – $30,000).

Regarding tax credits, they are used in the reduction of a taxpayer’s tax obligation or owed amount. For example, someone needs to pay $30,000 in income taxes, and they only qualify for $5,000 in tax credits. So, their tax obligation will be reduced to $25,000 ($30,000 – $5,000).

Personal income tax rates vary from country to country because of different laws and government systems. Although, the majority of the countries employ a so-called progressive income tax system, which means those who earn more are subject to a higher tax rate compared to the lower-income earners.

 

What Does Personal Income Tax Apply To?

Personal income tax applies to the following entities:

  • Self-employed individuals
  • Full-time employees

 

What Is a Tax Return?

A tax return is a special document filed with the tax authority that contains information needed to calculate taxes for an entity. The document specifies reported income, expenses, and other financial information. It consists of three sections:

  • Income (mentions all sources of income of an entity)
  • Deductions
  • Tax credits

After accounting for tax benefits (deductions and tax credits, etc.), taxpayers arrive at their tax return, which is the amount owed to the government in taxes.

Typically, tax returns must be filed annually (applies both to corporations and individuals).

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Earnings Before Tax (EBT) vs Pretax Income
  • Income vs Revenue vs Earnings
  • Taxable Income
  • Tax Shield

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