Federal Income Tax
Tax levied by the federal government on personal and business income.
Federal income tax is a progressive tax on earned and unearned income collected by the IRS. Rates range from 10% to 37% across seven brackets. Businesses pay federal income tax either directly (C corporations at a flat 21%) or through pass-through taxation (S corps, LLCs, sole proprietors report on personal returns).
Example
A sole proprietor with $85,000 in taxable income pays federal tax across the 10%, 12%, 22%, and 24% brackets, resulting in an effective rate around 17%.
Why It Matters for Your Business
Federal income tax is typically the largest single tax obligation for small business owners, making strategic planning essential to minimize the burden legally.
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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