Income Tax – Definition

Cite this article as:"Income Tax – Definition," in The Business Professor, updated July 30, 2019, last accessed December 4, 2020,


Income Tax Definition

An income tax refers to the amount of money that individuals and businesses are mandated to pay on income earned and profits made. There is no fixed rate for income tax, rather, the amount paid differs from person to person and business to business. Income tax is paid based on the income or profits made in a year.

Tax is one of the major ways governments generate revenue for projects and development of the state of country. In many countries, both federal and state governments expect individuals and business entities to file their income tax return per annum.

A Little More on What is Income Tax

Income tax is imposed by the government, every individual and business must pay tax on income generated and profit made. Failure to file an income tax return for a year is an offense which attracts penalty. Every state and country has a tax law. In the United States, the Internal Revenue Service is the agency responsible for the collection of tax and ensuring that citizens abide by tax law.

The history of income tax in the United States is incomplete without making reference to the 1812 war which led to the commencement of income tax payment in the U. S. Basically, tax generate revenue for the government, when the United States government imposed income tax in 1812, it was to settle debts that arose from the war.

Individual Income Tax

The individual income tax is also called personal income tax. It is the annual charge imposed on income generated by individuals. There are many sources of income for individuals, these are through wages, salaries and commission paid by customers and employers.

In the United States, not all individuals pay taxes on their income, there is a category of individuals that enjoy tax exemption benefit as stipulated by the IRS. Also, some individuals have tax deduction benefit in their income, this means all the money spent on health, education and investments will be deducted before the income left is taxed. There are many tax exemption and tax deductions rules, these are overseen by the IRS.

Business Income Taxes

Corporation income tax is the same as business income tax, this is a tax levied on the net earnings otherwise called profits that businesses generate within a year. Since there are many types of corporations, their income tax vary based on the corporation type and income earned. Whatever the form of a business is, it must file income tax returns with the IRS every year to avoid tax penalty.

State and Local Income Tax

Income tax is important to the development of countries, especially developing countries. Collection of income tax enables the government to source funds used for capital projects and other operations. Another benefit of income tax is that is allows a proportional distribution of wealth for many countries.

In many countries, individuals and businesses pay income tax at the state and local level. In the United States for example, states impose income tax on individuals and businesses. Only seven states in the United States do not levy income tax, according to a 2019 report.

References for “Income Tax

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