If you have a store or are thinking of opening one, you will need to know how the process of paying business taxes to the government works. If you do it individually, you will see that it is similar but with some changes, highlighting the aspects that differentiate Sales Tax vs Income Tax.
Beginner salespeople are often confused about the taxes they have to pay. Sales tax is the percentage that buyers must pay when purchasing certain items. The store owner is responsible for collecting and remitting it to the appropriate tax authority.
Income tax is the amount the owner must pay on the company’s total income. The amount is defined according to the total amount received in the fiscal period.
Differences between Sales Tax and Income Tax
In 43 states plus the District of Columbia, in the United States, you must comply with the Income Tax declaration from the moment you start working or operating a business.
In the whole country, it is indispensable to pay the Sales Tax according to the consumption and residence of the buyer. However, it is applied in different ways in each state or locality.
There are certain similarities between the sales tax and income tax in companies, which is why store owners often make mistakes when filing their tax returns, ending up in penalties. Several aspects differentiate them, and it is necessary to know them.
- All companies, including non-profit organizations, must pay income tax.
- Not all businesses are required to pay sales tax. It will be subject to the type of business and the products it offers to customers.
- The amount of a company’s income tax is determined by a business tax return.
- To calculate the sales tax, the total amount of the sale of a product is multiplied by the percentage of the tax rate established by the state and local government.
- To pay income tax, businesses require a business license and official registration according to the type of business and state requirements.
- Sales tax collection is only possible with a tax permit that allows the state tax authority to identify the business and grants sales authorization.
The business owner must be familiar with the tax regulations to comply with the payment of taxes effectively. Sales tax and income tax are indispensable, and although the former does not represent direct profits to the owner, it is their responsibility to collect such tax.
Sales Tax Advantages
To further compare sales tax vs income tax and understand the benefits of timely payment of each, it is convenient to know the advantages for the business and the end buyers.
Sales tax is a special tax, as it is collected from the end-users and not from the seller. It is an indirect tax since it is directly integrated into the purchase price of products, goods, and services.
Among its advantages are the following:
- Individuals pay the sales tax according to the number of products or goods they consume.
- This tax is simple; the amount paid to purchase a product is the same for everyone.
- The sales tax is levied on each product, but it does not represent too high an amount for the buyer, although it does represent a considerable amount of revenue for the government.
- The collection is automatic and is applied at the moment of the sale of a product, good, or service; therefore, we cannot evade it.
- Low-income people are exempt from most taxes, so paying sales tax helps them contribute to the nation’s development.
- Sales tax on luxury goods is paid only by those who buy them.
- It helps control the consumption of harmful products such as alcohol and tobacco. The rate on them is higher to reduce their consumption.
- The state can offer a discount on the total amount owed by being up to date with the sales tax.
Advantages of income tax
Income tax is a rate applied to a company’s total income, taxing the net profits of the legal entity. The amount can be progressive, proportional, or regressive. This tax is paid individually and has a major impact on the development of a country.
Companies, although small, must also comply with this responsibility. Generally, the tax is applied progressively, meaning that as income increases, a greater proportion is taxed.
Some advantages demonstrate the effectiveness of the payment of this type of tax:
- It allows progressive taxation on the total amount of the profit. It is an effective strategy in the distribution of wealth.
- Corporate profits are controlled and regulated with the payment of income tax since they are obliged to declare their income.
- The flow of income to the government is stable, even in a depression, and with an unemployment rate of 10%.
- With the proceeds of this tax, the government can build infrastructure and invest in sectors that need more attention, such as health and education.
Although in different ways, income tax is levied all over the world. This tax promotes a high-consumption economy with low personal rates in countries like the United States. However, the situation is different for companies because the corporate rate is high.
Small businesses have a certain disadvantage over larger ones since they do not receive advice on the payment of income tax as corporations do, to such an extent that they tend to evade part of the tax. The current system could change the situation and make the tax fairer for all companies.