Do you know what forsophobia is? It’s the fear of taxes and the IRS. Every tax season brings feelings of extreme anxiety, helplessness, and avoidance behaviors.
Before you get too stressed out, take a deep breath. Getting basic tax questions answered, such as “what is a tax liability,” can help you make better decisions for your business. You can also avoid huge penalties by understanding more about tax liabilities.
Continue reading to learn about tax liability and what it means for your business.
Understanding Tax Liability
All individuals and businesses are required to file income tax returns. If you don’t file your tax return on time, you have to pay a penalty of 5% of the unpaid taxes for each month that the tax return is late. You will also be charged interest, which will increase the amount of money that you owe.
The unpaid taxes that you owe the government is known as tax liability. This amount includes all the taxes you owe the IRS including income tax and capital gains tax that applies if you sell real property. The total amount of penalties, interest, and prior tax liability also increase your current tax liabilities.
Sales tax and payroll taxes are also different forms of tax liabilities. Where you sell products or services, the customer pays sales tax depending on the state they are in, which you must collect and send to the government. You are also required to withhold income taxes and taxes for social security and Medicare from your employee’s wages and send them to the government.
How to Reduce Your Tax Liability
For filing taxes, you need to know your total income in the taxation year. You will then reduce your income by your expenses in the year to determine your tax liabilities. You have to estimate your total tax liability and make quarterly installment payments throughout the year.
You can lower your tax liabilities by claiming deductions and tax credits, such as the employee retention credit. Working with tax companies that offer a variety of generic tax services such as tax filing and consultation and tax planning can help you manage your business tax. For example, you can claim a refundable credit for certain health insurance costs and qualified wages paid to employees.
Understanding the different deductions and credits that are available to you is an important step toward managing your tax liability. Misunderstanding the rules or misapplying them can lead to increased tax liability if you are audited. There are certain types of business deductions that the IRS pays close attention to like home office expenses, meals, travel, and entertainment.
More About What Is a Tax Liability
Now you know the answer to the question: “what is a tax liability?” Tax liability is the amount of money that you owe in taxes to the government. Making payments either fully or in installments is the best way to avoid interest and penalties.
If you want to learn more about your tax liabilities, check out our blog and read more articles to expand your knowledge. You can manage your business finances by learning more about it.