Effective Tax Rate
The average rate at which income is taxed.
Your effective tax rate is total taxes paid divided by total taxable income, representing the blended average rate across all brackets. It is always lower than your marginal rate because earlier dollars of income are taxed at lower rates. This metric provides a more accurate picture of your overall tax burden than the marginal rate alone.
Formula
Effective Tax Rate = Total Tax Paid ÷ Taxable Income × 100Example
A business owner with $150,000 in taxable income pays $30,000 in federal taxes—the effective tax rate is 20%, even though the marginal rate is 24%.
Why It Matters for Your Business
Knowing your effective rate helps you accurately estimate your total tax burden and compare it across years or against industry benchmarks.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
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