Basic Definition

If you are asking the question what is tax liability, and especially if you're a small business owner or starting a business, this article is for you! The term tax liability refers to the total amount of tax debt either you or your business owes to the tax authority - we know this as the Internal Revenue Service, or IRS. It is the agency that regulates the income tax rate and the amount of federal tax we pay, and what we refer to as our federal income tax, on our federal income. 

If you file an income tax return, this usually means you will either receive an income tax return or refund, or you will have an income tax liability, which is the amount you owe in taxes. 

Depending, of course, on your particular circumstances, Uncle Sam says you are behind on your income taxes and you need to pay, and may give you the opportunity to make tax payments in an installment agreement. One thing is sure regarding death and taxes (as the saying goes); everyone will die, and everyone will pay taxes. The IRS always gets their money!

The federal government will make sure you pay, one way or another, when you owe back taxes or a tax bill, as well as when you have a tax debt in your history. The last thing you want is to become an income tax liability, so be sure to pay your tax payment on time and thus reduce your tax liability. 

Business Tax Liability

If you own a small business or are self-employed paying self-employment tax, your total tax liability largely depends on your taxable income, which explains the vigilant cognizance to continuously reduce your taxable income. 

The type of business you are and the amount of taxable income you have for the previous tax year determine the tax rates you are charged, your filing status, and the tax brackets you fall in. The total of your tax liability is the amount of money you owe from tax liabilities, such as the following examples: 

• income tax
• capital gains tax
• sales tax
• self-employment tax
• back taxes you still owe the IRS 

Besides the IRS, there are other tax authorities you could have a tax liability with, namely your state and local tax agencies. Your state government makes individual state tax laws and has its own guidelines for when you have a tax liability with them. In order to stay in the black with Uncle Sam, stay on top of your business and personal income taxes each year.

Estimating Your Tax Liability

If you are a sole proprietor, an LLC, a general partnership, or an S corporation, you will use a method that's called pass-through taxation to estimate your total tax liability. This means that all profits from your business are taxed along with your personal income tax return.
 
The exception is a C corporation, which pays the usual federal corporate tax of 21% as well as state tax, which varies, of course. Any business except a C corporation should be estimating their yearly taxes in a quarterly fashion, for easier ability to make quarterly payments to the IRS and not have a huge tax bill at the end of the year. 

To accurately estimate your tax liability, take the current quarter's gross income of the business and calculate this amount as the basis for your yearly total tax liability. If the amounts fluctuate you can adjust the numbers accordingly moving forward. You need to base everything on a yearly total due to the graduated tax rate your taxes are paid by, even though you pay them quarterly. Remember to subtract your qualified business deductions for the quarter, the difference is your gross income and amount for the quarter, multiplied by 4 for the estimated yearly total tax liability.

Reducing Your Tax Liabilities

So how can you effectively reduce your tax liabilities? Well, that's where financial advice proves invaluable, and where we shine here at Boyd Group Services. Aside from this, however, there are a few steps you can take yourself with little difficulty. The first is to keep a better list of all your business expenses, keeping all receipts throughout the year and giving you more opportunities for legitimate deductions. 

Always pay your taxes on time, because as stated, money in taxes you owe the IRS is non-negotiable. In addition, for any money you owe not paid on time, the IRS will fine you exorbitant amounts that can quickly become out of hand. 

Last but not least, invest in your business. Putting money back into your business is one of the smartest investments you can make, because it's all deductible! So go ahead and purchase that new equipment and redecorate with the new furniture you really wanted. Get the latest technology for helping your business grow and succeed. These deductions will all reduce your taxable income and lower your taxes. 

Additional Facts

When you're just starting out or building your own small business, these kinds of questions are common. However, your business's financial situation is a key crucial component to your overall success. In order to reach your maximum potential and achieve the business goals you've set, you will need to have a good plan for growing your business and taking advantage of periodic growth opportunities. This is why having a top-notch financial advisor on your side can make all the difference. 

Here at Boyd Group Services, we can assist your small business with multiple financial services and options which are all designed to help you grow your business and achieve the kind of financial security you need. Having a great financial advisor is one of the best business decisions you can make, and takes all these kinds of worries and puts them in good hands. This way you can put your energy and focus into running your business, where it should be. 

Whatever your business's financial needs are, Boyd Group Services can help. Schedule a call today so we can discuss your situation, and have the financial freedom you've been looking for.