Corporate vs. Personal Income Tax: Key Differences Explained

In this article, we will discuss corporate vs personal income tax. Corporate tax is an expense of a business (cash outflow) levied by the government that represents a country’s main source of income, whereas personal income tax is a type of tax governmentally imposed on an individual’s income, such as wages and salariesRemunerationRemuneration is any type of compensation or payment that an individual or employee receives as payment for their services or the work that they do for an organization or company. It includes whatever base salary an employee receives, along with other types of payment that accrue during the course of their work, which.

Summary

• Corporate tax is a direct tax paid by businesses to the government on their earnings. The funds collected from the taxes serve as a country’s source of income and are directed to financing various projects for the benefit of its citizens.
• The maximum corporate tax rate equal to 35%.
• Personal income tax is a direct tax paid by individuals to the government on their personal income coming from monthly salaries and wages.

What is Corporate Tax?

Corporate tax, also called company tax or corporation tax, is a direct tax levied on a company’s income or capital by the government.

Corporate taxation is a difficult aspect in a country’s jurisdiction, and rules around it vary a lot from country to country. Some countries are considered to be tax havensTax HavenA tax haven or offshore financial center is any country or jurisdiction that offers minimal tax liability to foreign individuals and businesses., such as Curacao, Fiji, Cyprus, etc., and are very valued by corporations due to soft tax policies in such areas.

Corporate taxes are subtracted from the earnings before tax figure in a company’s income statementIncome StatementThe Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or to arrive at net income (net profit) generated for a particular period.

The maximum corporate tax rate is equal to 35%.

What Does Corporate Tax Apply To?

Corporate taxes apply to the following institutions:

• All corporations originated in the country (small, medium, and large)
• Corporations running a business inside the country
• Foreign enterprises with a permanent establishment in the country
• Corporations that are residents for tax purposes inside the country

What is Personal Income Tax?

Personal income tax is a tax imposed by a government on an individual’s income. In other words, the income tax is payable on an employee’s wages and salaries.

Most individuals do not pay the individual income tax on the full amount of income due to tax exemptions, deductions, and credits. A series of deductions is offered by the U.S. Internal Revenue Service, e.g., deductions for healthcare and education expenses, which taxpayers benefit from to reduce their taxable income.

Imagine an individual who earns $200,000 in income and is qualified for $30,000 of tax deductions. In such a case, the taxable income will be reduced to $170,000 ($200,000 – $30,000).

Regarding tax credits, they are used in the reduction of a taxpayer’s tax obligation or owed amount. For example, someone needs to pay $30,000 in income taxes, and they only qualify for $5,000 in tax credits. So, their tax obligation will be reduced to $25,000 ($30,000 – $5,000).

Personal income tax rates vary from country to country because of different laws and government systems. Although, the majority of the countries employ a so-called progressive income tax systemProgressive TaxA progressive tax is a tax rate that increases as the taxable value goes up. It is usually segmented into tax brackets that progress to, which means those who earn more are subject to a higher tax rate compared to the lower-income earners.

What Does Personal Income Tax Apply To?

Personal income tax applies to the following entities:

• Self-employed individuals
• Full-time employees

What Is a Tax Return?

A tax return is a special document filed with the tax authority that contains information needed to calculate taxes for an entity. The document specifies reported income, expenses, and other financial information. It consists of three sections:

• Income (mentions all sources of income of an entity)
• Deductions
• Tax credits

After accounting for tax benefits (deductions and tax credits, etc.), taxpayers arrive at their tax return, which is the amount owed to the government in taxes.

Typically, tax returns must be filed annually (applies both to corporations and individuals).

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Earnings Before Tax (EBT) vs Pretax IncomeEarnings Before Tax (EBT) vs Pretax IncomeActually, there is no difference between earnings before tax (EBT) vs pretax income. Both terms denote the same concept and can be used
• Income vs Revenue vs EarningsIncome vs Revenue vs EarningsIncome, revenue, and earnings are probably the three most widely used concepts in accounting and finance. All the terms denote measures of a
• Taxable IncomeTaxable IncomeTaxable income refers to any individual's or business’ compensation that is used to determine tax liability. The total income amount or gross income is used as the basis to calculate how much the individual or organization owes the government for the specific tax period.
• Tax ShieldTax ShieldA Tax Shield is an allowable deduction from taxable income that results in a reduction of taxes owed. The value of these shields depends on the effective tax rate for the corporation or individual. Common expenses that are deductible include depreciation, amortization, mortgage payments and interest expense