An Overview of Taxes: How They Affect Your Personal and Business Finances Each Day

Written by: Cash101 Staff

Taxes are a necessary part of everyday living. Governments need to charge taxes in order to fund their operations. As a result, both individuals and businesses use taxes on a regular basis. When it comes to taxes, there are many types that you will need to know about so that you can engage in better tax planning strategies. When it comes to individuals, they will usually be liable for income taxes, estate taxes and capital gains taxes. Businesses are liable for a different group of taxes which include corporate taxes, payroll taxes and sales taxes. With all of the different types of taxes in mind, both individuals and businesses will be in better position maximize their deductions and save money.

INCOME TAXES

The most common type of taxes for individuals is income taxes. These are taxes that you pay based on your personal income. People pay income taxes through their wages and salaries as well as other types of income such as pensions and unemployment compensation. Fortunately for taxpayers, the income taxes are charged on a progressive rate which means you pay more as you make more money. One thing to keep in mind is that some states don’t charge any income taxes. As a result, you may not necessarily be liable for this type of tax as an individual if you live in one of these states.

ESTATE TAXES

Another common type of taxes for individuals is estate taxes. This is a type of tax that is charged on the basis of how much a person inherits. Quite a few states charge a certain rate that people need to pay once they receive their inheritance. There are some states that don’t charge these taxes. When dealing with estate taxes, it is important to make sure that you will have sufficient income and savings after paying the estate taxes. This will help ensure that your inheritance can last you for as long as you need it to.

CAPITAL GAINS TAXES

One of the types of taxes that are often charged to individuals is capital gains taxes. These are taxes that you pay based on what your earn from your investment portfolio. The capital gains taxes are also charged on real estate, stocks, precious metals and collectibles that you sell. This type of tax can be quite high based on the type of the capital gains tax that you are charged. With capital gains taxes there are both short term and long term capital gains taxes. A short term capital gain is something that you sell within one year whereas a long term capital gains tax is when you are charged for an asset that you sell one year or later after acquiring it.

BUSINESS TAXES

As well as individual taxes, there are also business taxes. Like individuals, businesses are also liable for a variety of different types of taxes. Similar to individuals, business taxes are often in relation to income/profits, payroll transactions and sales revenue. Business taxes are charged on a progressive scale so organizations that make more money will often be liable for more taxes. However, businesses can use deductions in order to minimize their tax liability just like individuals can.

CORPORATE TAXES

Corporations are entities that are separate from the owner. Instead of having an owner, corporations have shareholders and a board of directors. These individuals usually own corporate stock or a percentage of the assets of the company. There are two types of corporations which are C and S corporations. While S corporations are not taxed on their profits C corporations are. As a result, a C corporation will need to pay taxes on the profits they earn. As well as being liable for taxation on their profits, the shareholders are also liable for taxes as well.

PAYROLL TAXES

Most businesses hire employees to perform certain tasks. As a result, they are paid wages and salaries. Businesses that pay salaries and wages need to pay taxes on what they pay to their employees. A business needs to deduct taxes from the paychecks of their employees as well as pay that amount as well. The payroll taxes that businesses need to pay include social security taxes, Medicare taxes and unemployment taxes. Social security and medicare taxes are paid each pay period while the unemployment taxes are paid every quarter.

SALES TAXES

Businesses that sell products charge sales taxes in addition to the price of each product. They charge these taxes in order to pay sales taxes. Governments at the local and state level charge a certain percentage of all sales made in a particular area. The sales tax rate varies depending on the city and state. Sales taxes can be quite costly and it is therefore important for businesses to receive these sales taxes when they make a sale so that they can easily pay them once they are due.

TAX PLANNING

Since taxes can be a significant financial liability for both individuals and businesses, it is important to plan accordingly. With effective tax planning, both individuals and businesses can save a lot of money and be in better position to pay these taxes in a timely manner. This will not only help them retain some of their money but also help them avoid costly penalties and interest payments. When it comes to tax planning, it is beneficial to use all available deductions as well as use separate bank accounts to save funds for tax payments. It is also advantageous to receive guidance from a tax consultant or accountant who can ensure that you manage your tax liabilities properly.

CONCLUSION

Since taxes are necessary for both individuals and businesses to pay on a regular basis, it is important to know about the different types so that they can be better prepared to manage these liabilities. With a variety of different taxes, it can be overwhelming at times to know what is owed and ensure that timely tax payments are made. Fortunately for businesses and individuals, there are ways to limit their tax liabilities with effective planning. This planning will ensure that they pay their fair share while keeping most of their money.


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