For any working individual or business owner, making a profitable income is a usually a major goal. However, a higher income usually results in a higher tax rate. You may have even heard stories of people delaying additional income because they get “kicked into the next tax bracket.” But, what exactly does it mean and how do tax brackets affect your income?
What Are Tax Brackets?
In the simplest of terms, tax brackets refer a range of incomes to which a tax rate applies. Based on your taxable income, you may pay a higher or lower tax percentage than someone who falls into a different tax bracket. Traditionally, people in lower tax brackets will pay fewer taxes because they aren’t earning as much as those in higher tax brackets.
Currently, there are seven different tax brackets for individual taxpayers. The lowest bracket is subject to a 10 percent marginal tax rate while the highest is subject to 39.6 percent. Having said this, not every dollar you earn is taxed equally. As you earn more income throughout the year, you may jump from one tax bracket to the next. At each stage, you will be taxed based on your current income bracket. As you make more money, your taxes will increase accordingly.
Individual Tax Brackets vs. Business Tax Brackets
The tax brackets and relative tax rates will be different for businesses than they will be for individuals. If you own a business, it’s important to understand how tax brackets work and how earning more may lead to owing more taxes. You’ll want to consult with your tax professional to understand how the tax brackets will impact your tax rates throughout the year.
At the same time, you’ll want to maximize your deductions, exemptions and adjustments to make sure your adjusted gross income is where it needs to be. That way, your estimated quarterly payments are as accurate as possible and your tax preparation for the year goes as smoothly as possible.
Your Business Tax Experts
Count on Ferguson, Timar & Company to help your business navigate the complex waters of business tax preparation, quarterly estimated tax payments and tax brackets. Contact us today to set up a tax consultation and we’ll get you on the right path toward success.