The Basics of Tax: Frequently Asked Questions Volume II

After publishing the first article on the frequently asked questions on tax, we understood that this topic is as interesting as it is necessary. There are some fundamental questions, like what is the corporate tax rate, or what taxes are deducted from your paycheck, that may be more or less challenging yet they are always key.

Your knowledge about taxes may vary, you can very well know what is the capital gains tax rate you pay, or you may be barely starting to understand this world. Either way, it helps to dig into the basic questions so that we can move forward and understand more advanced concepts.

The Importance of Taxation Applying to Different Cases

Why Must I Know My Fair Share of Taxation Data

You may be wondering: why do I need to know what companies do taxes if I am an employee? Or why should I care about what is the corporate tax rate if I have an accountant? 

For starters, if you don't own a company, you still have to file your taxes every year. If you are an employee, the employer currently takes care of this for you, but wouldn't you want to know what taxes are deducted from your paycheck?

Same thing for company owners who rely on an accountant. If you have found an outstanding one, good for you! This is indeed important, but so is you knowing the basics of what your company is paying or not, what should be paying or not. Without further to do, we introduce you to these frequently asked questions, following the first volume of this article published in 2024.

Going Back to the Basics: What Is the Corporate Tax Rate and Other FAQ About Taxation

What is the Corporate Tax Rate?

If you're wondering what is corporation tax, you need to simply analyze the concept. Corporation tax is the tax the company pays on its income which is the revenue minus expenses and other deductions that may apply. Hence what is the corporate tax rate? It's the percentage that this structure will pay monthly or annually according to the law.

What Companies Do Taxes?

This answer is more complex because it will depend on the type of company, the jurisdiction, and the underlying conditions.

Companies established in a territorial taxation country and who don't generate or receive profit in the country are most likely exempt. Either way, this needs to be assessed carefully by a professional and considering the particular case.

Nonetheless, a common mistake is to think that these companies are free of tax when they are actually not: they tax at a zero rate. Therefore, they are required to file taxes each year. 

What is the difference, you may ask? The difference lies in the concept of taxation and in complying with the rules. The obligation of filing taxes may be present even if you will end up paying no taxes or low taxes, and thus needs to be complied with.

Another important aspect is the company structure. An LLC, for example, doesn't pay taxes per se but this is only because the tax liability is passed through to the members as personal income. Instead of paying corporate tax as an entity, each member includes the profits they obtained from the company in their personal income statement.

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What Is the Capital Gains Tax Rate?

What is the capital gains tax rate? It's the percentage that you pay for the appreciation of a property, and it becomes evident when the property is sold. This is when the capital gains tax becomes a thing, because the selling operation triggers a taxable event. 

In simple words, if you buy an apartment today and sell it after five years at a higher price, the difference is called capital gains, and is taxed in most countries. What is the capital gains tax rate? It depends on the jurisdiction, the amount of time you have held the asset under your ownership, and the current tax legislation. Usually, the rates range between 0% and 25% and they are lower than income tax.

What Taxes Are Deducted from Your Paycheck?

To answer what taxes are deducted from your paycheck, it's good to make a distinction between two types of taxes:

Payroll tax

This is deducted from your salary to cover medical insurance for people older than 65 years or younger people with disabilities, if applies. In the US, the payroll tax is composed of Social Security and Medicare.

Income tax

That’s right, income tax can also be deducted from your paycheck, and it has nothing to do with medical insurance. Based on your yearly income, the employee is authorized to retain your income tax rate and pass it on to the government. Does this exempt you from filing your taxes every year? 

If only the world were so simple! The answer is no because taxes deducted from your payroll are applied based on the information that you gave at a given time, but conditions may change. Therefore, by filing your taxes every year you'll know if you owe taxes or if you have credit in your favor.

Other deductions

If you're paying for private retirement or private medical insurance these deductions are made before taxation is estimated. That is, your taxable income is estimated after you subtracted those payments. 

Disclaimer: the information in this article provides an overview of the basic questions regarding taxation. However, these concepts are general and may not apply to all cases. This article doesn't replace a tax consultation. Before filing your taxes or making important financial decisions, go to a certified professional for advice.

A Conclusion: Why Do I Need to Know What is the Capital Gains Tax Rate?

Knowing what taxes are deducted from your paycheck can help you understand whether you owe taxes at the time of your returns. In the same way, knowing beforehand what is the corporate tax rate in a country is vital to estimate business viability. 

Therefore, these questions and answers may be useful for you to have a clear view of the intricate path that lies ahead when it comes to taxes.

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