A:

There is not much difference between the method of calculating or meaning behind the effective tax rate for individuals on the one hand and corporations on the other. Corporations and individuals in the United States are subject to progressive marginal tax levels, and their effective tax rates are affected by how much taxable income falls in each tax bracket. The effective tax rate for individuals equals adjusted gross income divided by total tax expense. Similarly, the effective tax rate for corporations equals earnings before tax divided by total tax expense.

Effective Tax Rate for Individuals

Suppose Tom earns \$100,000 in annual income. He is not likely to be taxed at \$100,000. His income is reduced in the eyes of the Internal Revenue Service through deductions, adjustments and exemptions. Suppose the sum total of those factors effectively reduces his taxable income by \$30,000.

In 2015, the marginal tax rate for income earned between \$37,450 and \$90,750 is 25%. This means that Tom's marginal tax rate is 25%. However, his first \$9,225 is taxed at 10%. His next \$28,225 is taxed at 15%.

He doesn't pay 25% on all \$70,000 (or \$17,500); instead he only pays \$13,293.75. His effective tax rate is 18.99%.

Effective Tax Rate for Corporations

Like individuals, corporations have a tiered tax system with increasing marginal rates. Companies can also write off losses or other expenses to reduce their taxable earnings from year to year. Also as with individuals, the effective tax rate for corporations is a better assessment of tax burden than the marginal rate.

RELATED FAQS
1. How are effective tax rates calculated from income statements?

Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>

3. What is the difference between a state income tax and a federal income tax?

Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
4. In which countries do high-income earners pay the most tax?

Find out which countries require high net worth individuals to pay the most taxes. Most of these countries are in the European ... Read Answer >>
Related Articles
1. Taxes

What's a Marginal Tax Rate?

The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
2. Taxes

How Do Apple's Taxes Compare to Other Tech Giants? (AAPL)

Analyze Apple's recent tax history to determine how geographic sales mix, foreign profit reinvestment and tax credits are influencing tax rates versus peers.
3. Taxes

Highest Corporate Taxes By Sector

The amount a U.S. company pays in tax depends upon the sector it is in.
4. Taxes

Do U.S. High Corporate Tax Rates Hurt Americans?

The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
5. Taxes

The History Of Taxes In The U.S.

The number of taxes that we now consider a given did not always exist. Find out how they arose.
6. Insights

How Fortune 500 Companies Avoid Paying Income Tax

President Donald Trump is not alone in not paying taxes.
7. Taxes

How Much Tax Do You Really Pay?

When you add direct and indirect taxes together, your real tax rate is much more than you expected.

3 Federal Income Tax Facts You Didn't Know

Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
9. Taxes

Opinion: Trump-Branded Taxes - Another Luxury Product

Trump's tax plan offers less and less to most taxpayers â€“ and more and more to the top tier.
RELATED TERMS
1. Tax Rate

A tax rate is the percentage at which an individual or corporation ...
2. Federal Tax Brackets

Income tax groupings specified by the Internal Revenue Service ...
3. Flat Tax

A system that applies the same tax rate to every taxpayer regardless ...
4. Income Tax Payable

A type of account in the current liabilities section of a company's ...
5. Tax Reform Act Of 1986

A law passed by the United States Congress to simplify the income ...
6. Tax Break

A tax break is a savings on a taxpayer's liability. A tax break ...
Hot Definitions
1. Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
2. Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
3. Risk Tolerance

The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
4. Donchian Channels

A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
5. Consumer Price Index - CPI

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
6. Moving Average - MA

A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...