Income tax is levied by the government on the income of individuals and businesses. Income tax is levied on both earned and unearned incomes. Examples of earned incomes include salaries, wages, tips, sales profits and commissions. Examples of unearned incomes include interest from savings accounts, dividends from stocks, and inheritances.
Employed individuals usually have their income tax automatically deducted by the employer every payday. This tax is called withholding tax since the employer withholds the amount. The tax withheld is then used to pay for the employee’s annual income tax.
In case of over-payments, the employee can either get a tax refund or can opt for the amount to be credited to the next year’s tax payments. In case the actual income tax to be paid is over the amount withheld, the employee will need to pay the difference directly to the government.
Self-employed individuals needs to file their own taxes. When computing personal income tax, all expenses that can be deducted should. This lessens income tax liability. People with businesses often purchase assets under their business’ name instead of getting a pay increase and buying the asset (i.e. car) under their name so as to avoid personal income taxes. This also results in lower taxes for the business, since the purchase will be reflected as a business expense. This tactic goes on all the time, although it can be viewed as unethical, especially if the business is not a private company.