As the name suggests, income tax is the tax imposed by the government that a legal entity (individual or company) has to pay on the income earned during a financial year. This tax is charged according to the magnitude of income.
Income tax is a recurring form of expense for a business because it has to be paid every year. It is deducted from a company’s net profit. The government uses income tax to fund public services, pay off its obligations and provide goods for the public.
There are three types of taxes, they are:
- Individual income tax: These are taxes levied on an individual's income such as wages, salaries, and others.
- Business income tax: These are taxes levied on the income of corporations, partnerships, self-employed contractors, and small businesses.
- State and Local income tax: In the US, citizens pay federal tax irrespective of their states. In addition to that, most states and sometimes local governments impose taxes.