income tax

When you earn money — from a job, a business, interest on savings, or a profit on selling something — the government typically takes a slice of that earning. That slice is income tax. It is probably the tax most people think of first, because it appears on a paycheck and on the annual form everyone dreads filling out.

Income tax is a tax charged on the income of a person or a company. The key word is income, meaning what you earned, not what you spent or own. For an individual, it is usually figured by starting from total income, subtracting allowed deductions to reach taxable income, then applying tax rates to get the tax owed. For a company, it works similarly but starts from profit: a business pays corporate income tax on its taxable profit, not on its total sales. For example, if a company has 1,000,000 of revenue and 800,000 of deductible costs, its taxable income is 200,000, and at a 25 percent rate it owes 50,000 in income tax. The tax is an expense that reduces the profit left for owners.

Income tax is central to accounting because it is calculated on taxable income, which is defined by tax law and differs from the accounting profit shown on the income statement. A company records an income tax expense in its financial statements, but the actual cash it sends the government in a given year can be a different amount, and the difference is tracked through deferred tax accounts. Getting this right matters: it affects reported net income, the cash a business keeps, and whether it stays on the right side of the law.