What is the difference between personal and business taxes?

An income tax is a tax levied on both individuals and businesses based on the income earned by them. The taxation rates are different for different people, businesses, and individuals. Personal income tax levied is proportional to the income earned and is usually paid once a year. On the other hand, business entities pay taxes every quarter. Let us discuss the personal and business taxes in detail.

What is Personal Tax?

Personal tax is directly taxed on an individual's income by the government. Individuals can save their taxes by the exemptions, credit limits allowed by the government. The exemptions include HRAs, education expenses, loans, mutual funds, etc. These deductions and exemptions are offered by the government and are subject to change. The government updates the tax policies every year or once in two years. The minimum tax slab is Rs 5,00,000, and the Individuals who earn below this slab are exempted from tax.

Let us assume that an individual earns Rs. 6,00,000 p.a. and is qualified for Rs. 50,000 tax deductions. In this case, the taxable income of an individual will be Rs. 5,50,000 (Rs. 6,00,000 - Rs. 50,000). On the other hand, tax credits are deducted from the taxpayer's tax obligation. For example, an individual’s tax obligation is Rs 50,000, and he qualifies for Rs 10,000 as tax credits. The tax obligation of an individual will be reduced to Rs 40,000 (Rs 50,000 - Rs10,000)

Income earned by an individual = 6,00,000

Tax Deductions = 50,000

Taxable Income = 5,50,000

The personal tax rates are different from country to country due to the laws and government systems. The individuals who earn more pay more income taxes compared to low-income individuals.

The personal income tax is applied to:

Salaried individuals / Full-time employees
Self-employed individuals

What is Business Tax? / What is Corporation Tax?/ What is Business taxation?

Business tax is an income tax paid on the net earnings and levied on its income. It is a direct tax and is often called a corporate tax. The maximum corporate tax rate is 35%. Business taxes are subtracted in the Income statement to calculate the Net Income of a company.

The business taxes are applied to:

All corporations(small, medium, and large) that are listed and working in the country.
Foreign companies with a permanent establishment of business in the country
All the companies that have permanent residence for tax purposes inside the country.

Business Tax VS Personal Tax

The filing of taxes is a requirement for both individuals and business owners. There are a lot of similarities between business and personal tax, but both are not the same. Personal taxes and business taxes are very different from each other. The difference between both is as follows:

Particulars	Business Tax	Personal Tax
Definition	Business tax is an income tax paid on the net earnings and levied on its income. It is a direct tax and is often called a corporate tax.	Personal tax is directly taxed on an individual's income by the government.
Difference in Dates	Business taxations have several tax deadlines. Business owners pay quarterly tax, payroll taxes that are filed monthly, and final tax returns due annually, between March and May.	Individuals usually know their due tax date, i.e., April 15, except for holidays. They pay their taxes annually.
Tax Rates	Large companies pay corporate tax and file different tax forms than a self-employed individual, sole proprietor, etc. Small companies file a Form 1120S. While partnership companies file several documents like Form K1, the tax rates are comparatively higher than self-employed individuals.	The personal taxes applied to individuals generally have low tax rates as compared to business taxes. For example, the tax rates of self-employed individuals are small amounts. Self-employed individuals don't have employers, so they pay self-employment tax and pay both the employer and employee contribution. The self-employment tax covers the health and social security of an individual.
Payment Expectations	The businesses pay taxes every quarter.	An individual pays taxes annually.
Business Deductions	The business has many deductions available to them. For example, payments made to employees, business investments, traveling costs, office expenses, rent expenses can be deducted on a business tax return.	Individuals have a very limited number of deductions available to them, like health and social security exemptions, etc.
Change	Business Owners should hire a tax professional to guide them through the basics of the difference between personal and business taxes and to have a sound knowledge related to penalties and tax systems.	An individual might not need to know the different tax systems of personal and business taxes because they only pay personal taxes and not business taxes.

Business Tax types / What taxes do businesses pay?

The individuals mostly pay the government and state income taxes. However, business owners and entrepreneurs pay various taxes, and the taxes are as follows:

Income Taxes – The first type of tax that business owners pay is the Income-tax. It is a mandatory tax that every business pays. This tax does not apply to Partnership firms. Partnerships firms file an information return tax. Apart from that, you would also have to file an individual income tax return every year using IRS Form 1040.
Estimated Taxes – Estimated taxes are paid quarterly to cover the income tax on an individual’s income.
Self-employment Taxes – The self-employment taxes are paid by sole proprietors, general partners, and members of limited liability companies. It is paid to cover Social Security and health taxes.
Employment Taxes – Employment tax is paid by the companies that hire employees. If a company has employees, he/she must deposit the government income tax, social security and Medicare taxes, and federal unemployment tax.
Sales Taxes – Businesses collect sales taxes on sales.

Paying business taxes is a complicated and challenging task. Many small business owners hire tax professionals to help them save tax and guide on tax strategies. The more business owners know about tax requirements and tax systems, the better their business will work and take full advantage of the law.

Thus, to conclude, business taxes and personal taxes are very different from each other. Personal taxes are paid by an individual and are directly taxed on the income by the government. On the other hand, business tax is an income tax paid on the net earnings and levied on its income. The meaning and difference between both the taxes and their applicability are all explained above.

Also read:

1) Why Do We Pay Income Tax in India? Importance, Applicability & more
2) Provisions for Income Taxes in India Applicable for Salaried People.
3) How To Pay Income Tax Online? Step-By-Step Guide.
4) The USA vs India: Taxation System
5) OkCredit: Simple, Paperless & Secure solution for businesses

FAQs

Q. How many types of taxes are there?

Ans. The taxes are mainly categorised into two parts, Indirect tax and Direct Tax. Direct taxes are applied directly to income, like income tax, corporate tax, wealth tax, etc. Personal income and business income are subjected to direct tax. Indirect taxes are not paid directly like sales tax, service tax, GST, value-added tax, etc.

Q. Is Form 1040 a personal or business?

Ans. Form 1040 is a standard tax return form filed by individuals or sole proprietors. However, this form is used by business owners as well as per the business requirements. Certain businesses and entrepreneurs need to fill this form for tax returns.

Q. How can I calculate the estimated taxes for a business?

Ans. The calculation of estimated taxes can be done by an individual or tax professional. The steps for the calculation are as follows:

Estimate the taxable income of the year
Calculate the taxes on income and self-employment taxes
Divide the estimated total tax in four equal parts or into quarterly payments
Deduct the exemptions, if any, such as health and social security tax, employee's income, business investment, payroll amount, traveling charges, rent allowances, etc.
Send an estimated quarterly tax payment to the IRS after making all the exemptions and deductions.