Learn Your Tax Liability & How to Calculate It

When tax season comes around, nerves fly high. The sheer variety of tax filings often leave people wondering if they’re missing out on important information. 

Whether you share a full-time job with a spouse or are a self-employed individual, your tax liability needs to be carefully monitored. Thankfully, a little organization goes a long way. If you’re concerned about accurately reporting your annual income, read on.

We’re going to discuss tax liability, how to calculate it, and share some useful tips for improving your filing accuracy. Say farewell to confusing, last-minute taxes and hello to a more empowered future.

Quick Facts About Taxes

Before we launch into the different forms tax liability can take, let’s take a look at some quick tax facts. If you’re feeling a little overwhelmed by tax season, don’t worry: you’re not alone.

To date, individuals receive the largest share of federal tax breaks in the United States. Recent research has found this overwhelmingly takes the form of health insurance and employer-based healthcare. This is followed close behind by earned-income tax credits, retirement earnings, and personal property taxes.

That said, at least 50% of Americans feel they pay too much in federal income tax. One reason for this can be inaccurate filing during tax season. When’s the last time you considered your tax exemptions and tax deductions?

Whether you’re a self-employed individual or have recently started a C corporation, there’s a tax liability solution ready to save you money.

Tax Liability for Self-Employed Individuals

When there are nearly 45 million workers in the country who are self-employed, it stands to reason this form of tax liability needs extra study. If you’re self-employed — or are considering taking this path — you’ll want to keep reading.

Self-employment taxes are unique in that they require you to report everything on your own. Whereas a traditional full-time job will automatically withhold money out of each check, it’s up to you to take a percentage out of each check received. 

How much you owe in your tax liability means looking at:

  • State income tax
  • State sales tax
  • Federal income tax

A useful adage among self-employed individuals is to withhold 25% to 30% of each check. That said, you may need to withhold a little less or a little more depending on your business type and where you live. If you owe more than $1,000 in one year, you will be required to pay quarterly estimated taxes.

Just like a traditional job, you can deduct work-related expenses from your tax liability to save money. This is an often-overlooked aspect of the tax liability conversation, frequently leading to self-employed individuals paying too much. 

Common work-related deductions you can consider include:

  • Annual subscriptions to online portfolio services or digital contract services
  • Computer equipment such as Adobe subscriptions, graphic tablets, or keyboards
  • Digital advertising expenses
  • Fuel costs
  • Printing supplies, such as paper or ink

Keep in mind these deductions should be directly related to your business. Attempting to deduct random meals or video games for stress relief sounds nice, but could expose you to an audit down the road. Be sure to keep receipts of all your business purchases in a physical or digital folder. 

Tax Liability for Traditional Part-Time and Full-Time Employment

If you work a traditional job, your employer automatically withholds a certain amount out of each paycheck. This tax withholding goes to essential services such as Social Security and Medicaid.

Medicare takes 2.9% out of your weekly or monthly wages. Social security tax takes 12.4% out of your weekly or monthly wages. Federal unemployment tax is a little unique in that you can determine your payment based on the state you live in.

Tax Liability for Employers 

If you’re an employer with regular employees on the payroll, it’s your responsibility to report the right amount to the IRS. As explored above, each paycheck is required to take out a percentage for vital public services.

Your entity type and the number of employees you have are irrelevant here. Even self-employed individuals are required to treat their income as a taxable wage.

Related: How R&D Credits Help With Payroll Taxes

Tax Liability for Single Individuals With No Children

This is one of the most straightforward ways of determining tax liability. When you don’t have to consider a spouse or children, you can just focus on your annual income. 

The gross amount of income you make per year will determine the percentage you owe. Practical examples to get you started are below based on the seven federal tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

$0-$9,950 = 10% of the total taxable income

$9,951-$40,525 = A minimum of $995, then an additional 12% of any income made beyond the minimum $9,950

$40,526-$86,375 = $4,664, then an additional 22% of any income made beyond the minimum $40,525

$86,376-$164,925 = $14,751, then an additional 24% of any income made beyond the minimum $86,375

$164,926-$209,425 = $33,603, then an additional 32% of any income made beyond the minimum $164,925

$209,426-$523,600 = $47,843, then an additional 35% of any income made beyond the minimum $209,425

$523,601 or more = $157,804.25, then an additional 37% of any income made beyond the minimum $523,600

You don’t have to figure out your tax liability by yourself. Parachor Consulting’s blend of legal and engineering professionals assists taxpayers every year with narrowing down business costs.

Tax Liability for Married Couples Without Children 

This is where your situation gets a little more complex. The tax liability for married couples involves combining your gross annual income under one banner. 

While it’s imperative you become comfortable with conducting tax research or working with tax professionals, you can get started on your own calculations with the list below. It follows a similar formula to the tax liability percentages required by single individuals without children:

$0-$19,900 = 10% of the total taxable income

$19,901-$81,050 = $1,990, then an additional 12% of any income made beyond the minimum $19,900

$81,051-$172,750 = $9,328, then an additional 22% of any income made beyond the minimum $81,050

$172,751-$329,850 = $29,502, then an additional 24% of any income made beyond the minimum $172,750

$329,851-$418,850 = $67,206, then an additional 32% of any income made beyond the minimum $329,850

$418,851-$628,300 = $95,686, then an additional 35% of any income made beyond the minimum $418,850

$628,301 or more = $168,993.50, then an additional 37% of any income made beyond the minimum $628,300

Related: Easily Calculate the R&D Tax Credit For Great Returns

Tax Liability for C Corporations

This may come as a surprise, but this is one of the more straightforward tax liabilities on the list. Thanks to the new Act passed by the administration, C Corporations are required to pay an income tax rate of 21% no matter what.

The only other detail you need to keep in mind is that of double taxation. The corporate level and the shareholder level will both be taxed separately. Whether or not this will increase or reduce your liability will depend on your unique business. 

What Are Other Tax Deductions I Should Know About?

The range of tax deductions is varied and vast. You’d be surprised by how much you can reduce your tax liability with a little research.

Your first question is to tally up all the factors in your life that could go into a deduction. This means whether you’re single, married, with children, a business owner with employees, or a self-employed individual. Then you can take into account additional details like military status, student status, or working visa status.

It’s also important to know the difference between itemized deductions and standard deductions. An itemized deduction is going through each deduction individually and tallying them up, while a standard deduction is a lump sum determined by your filing type. 

For example, a single taxpayer with no children could take a standard deduction of $12,000. An itemized deduction, on the other hand, could be a lower or higher number than that.

Child Tax Credit

The examples provided above were for single and married tax filers without children. If you have children younger than seventeen, you have the ability to claim them on your return to save money.

The child tax credit can be claimed as high as $3,600 for every child under the age of six. This lowers to $3,000 for those over the age of six but under the age of seventeen. Regardless of how many children you have, you can claim this useful tax credit to save money.

R&D Tax Credit

Are you a business that utilizes your background in the sciences to solve technical problems? You may just qualify for the R&D Tax Credit, one of the most powerful and nuanced tax benefits in existence.

These helpful tax credits are designed to encourage innovation, new product development, or industries that utilize engineering principles in the course of their business. This also helps provide a fallback if your new product line or technical work doesn’t yield the financial rewards you expected. You’ll qualify for this tax credit if your business:

  • Conducts research to improve an existing product or create a new one
  • Testing of new or improved products to increase quality or functionality
  • Active experimentation in a trial-and-error process

IRC Section 174

In a similar vein to the R&D Tax Credit, you can also consider deducting on the basis of the invention. If you’re an inventor constantly working toward your next great creation, this is one way to relieve your tax liability.

What makes IRC Section 174 different than the R&D tax credits is that the expenses need to be R&D costs in the experimental or laboratory sense

Expenses that can be deducted under the IRC Section 174 include:

  • Employee wages for research
  • Patent fees
  • Pilot model costs

In most cases, if you have IRC Section 174 expenses, then you are eligible for the R&D tax credit. If you’re unsure about whether or not your research qualifies, don’t be afraid to reach out and ask for help. The more you know about your tax liability, the more you can save.

Business Insurance 

The backbone of any sturdy business is good insurance. This is a tax deduction you should consider, especially if you’re thinking of adding onto your pre-existing plan.

Types of business insurance you can deduct include:

  • Auto insurance (if your vehicle is directly related to your business)
  • Life insurance for your employees
  • Property coverage for equipment or belongings (especially if you work from home)
  • Liability coverage
  • Malpractice insurance
  • Business interruption insurance

This is not a comprehensive list of all the business deductions you can tally alongside your tax liability. Remember that tax liability changes on a rolling basis, so make sure to stay in touch with local state regulations and federal laws.

Tax Liability – Final Thoughts

Your tax liability is in constant flux. One year you can owe very little thanks to itemized deductions, but another year you might owe more. 

Determining your tax liability means tallying up the unique details of your life, such as being married or not having children. You’ll then need to factor in your business type and narrow down the deductions that can save you money. Consistent recordkeeping and asking for help will go a long way in keeping your liability low.

Trying to save money on taxes this year? Reach out to Parachor Consulting this year to learn more about deductions you’ve missed or catch up on missed tax years.

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