taxes, employees, paymentI’m trying to understand how US tax code works. Let me give you a simple example. Say, as an employer my income is $100,000 and I paid $40,000 in wages to my employee. Do I pay my income tax on $100,000 or on $60,000?
I think you better read up a little on company law. You start a company, the company pays you and pays your employee. The perspective is that the company is a separate entity, even though you own it.
In most countries, businesses pay taxes on their earnings before taxes – that is, your profit after expenses and interest related to your business in its reporting period.
Individuals, on the other hand, pay taxes on gross income give or take tax deductions, which translates to taxable income. This may or may not include employees such as a babysitter depending on the country you’re living in. (And frankly, I do not have the beginning of a clue of whether household employees are tax-deductible in the US.)
What’s unclear in your question is whether you’re operating as a business (in which case, yes by all means after), or as an individual (in which case maybe).
If I may put a suggestion forward: ask an accountant. And ideally, if you’re a business, hire that accountant to worry about this mess of paperwork and subtlety moving forward.
What @SeanOCVN says is correct but as commented, it requires a little more meat on the bone.
The Company Let’s say in a single tax year the company has sales of $1million (also known as revenue I believe).
The Company is likely to have expenses - Let’s say…
$100,000 for office rent, electricity, general maintanance, insurance, travel
$200,000 inventory (which is later sold to customers)
$400,000 salaries/wages
In some countries, a Company is required to contribute to pension or health insurance for each employee… so I am going to throw that in to…
$100,000 pensions/health insurance contributions
This implies $1million of sales were possible when the company spent about $800,000 which gives a profit of $200,000
What are the taxes that would be paid? Let’s assume that where ever the company is based there is a flat rate sales tax on everything of 20%.
The Company will likely pay sales tax when it buys/pays for office rent, electricity, general maintanance, insurance, travel and its product inventory. In most countries, they can claim these taxes back but you pay them to the landlord, electricity company etc etc when you pay their bills. Thus, it gives them a tax credit. In my example above, $100,000 expenses, 20% sales tax is $20,000 which will be a tax credit.
Buying the products which are later sold to customers had tax. Let’s assume 20% tax also applies to these, so $200,000 inventory, 20% tax implies $40,000 which will also be seen as a tax credit.
Total tax credit is thus $60,000 okay?
Now…
The Company will charge tax on the products it sells. It had sales of $1million. Again - rough figures - included in that $1million is 20% of sales tax they charged customers which should go to the taxman. That is roughly $200,000 owed to the tax man.
Then there is the pension/health insurance contributions of $100,000. I will apply a fictional 10% tax, implying $90,000 went to pension/health insurance company, $10,000 went to the tax man.
Ah! But the company made a profit - so after the company has paid all the above taxes, and still managed a profit, something called Corporation Tax applies. It varies from country to country and is in the news alot recently because some companies based their head office in a more tax friendly country. In the US, corporation tax is on a sliding scale, the greater your profits, the higher the tax. In the UK its 19%, Ireland its 12% and Germany a little like the US is sliding scale up to 35% I think. So, you sold $1million, and it cost the company $800,000 to generate $1million, so there is $200,000 profit, and the taxman will take a slice of up to 35%.
So, on that $1million, a tax credit of $60,000, followed by tax debt of $200,000 and $10,000 implies $210,000 tax is due, plus the corporation tax (a % of the 200,000 profit).
All the above are taxes related to the company only. The taxes will go to various departments, but I consider tax if it is money that goes out of my company and outside my control.
The Employees Then there are employee related taxes. It varies so I will put a fictional 25% employee tax on the $400,000 salaries total. This implies employees took home $300,000 while $100,000 went to the tax man.
The taxes (and responsibilities) of a company differ greatly than those of am employee.
When you own a company you can be more tax efficient by moving the responsibility to another country (where tax is lower). Google, Star Bucks, Apple are under review in Europe for what these companies argue is tax efficiency but what some governments refer to as tax avoidance.
I have read a few folk here recommend lawyers to help which I find strange. An accountant deals with tax legislation for companies, or a tax advisor deals with such for personal tax. A lawyer is handy if your name is Walter White and your Chemistry Tuition has proven to be an unhealthy but profitable career investment.
And on the subject of taxes, there is alot a company can do to be efficient with tax payments. Apple has several billion held in offshore bank accounts - these are profits made from foreign sales. I think we are talking about $70billion (yes, billion). The taxman would take 30% or more of that if Apple would be kind to transfer the money from a foreign Apple company, to the US company. Naturally, Apple would prefer not to pay that 30% and thus they don’t transfer the money into the US. But, when they need money in the US, they just borrow it. Everybody knows they are cash rich, they can pay their bills so they can borrow very cheaply. Unfortunately for the tax man, borrowing is tax friendly, it can reduce your tax liability. So Apple goes to the stock market and sells a bond to raise $10billion and it reduces the taxes it must pay on its US sales since its debts have increased. Apple have offered to bring the money home and create new jobs with it if the Government would avoid taxing it but Uncle Sam does not like that idea.
I hope the above helps. I’m not a tax advisor or tax man but I do have a business of my own. My numbers are a little off above but it should give you a general principle on what goes where, and who is responsible.
Businesses are able to deduct eligible expenses to reach the amount of taxable income. Businesses are able to take a tax deduction for the wages paid to its employees.
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