Taxes are an unavoidable part of employing people around the world, but tax laws vary by country, which can make compliance difficult for global employers. One of the most common types of tax is income tax. Employers must ensure they withhold the required income tax from employees’ wages in order to comply with local regulations. Failure to do so can result in fines and other penalties for your business.
This guide will cover everything employers need to know about income taxes, including the different types, how they vary around the world, and how to calculate them.
What Is Income Tax?
Income tax is a type of tax imposed on both individuals and businesses based on their earned incomes. Individuals and businesses may be subject to income taxes at both national and local levels. For example, the United States imposes income tax at the national level, and most states also collect their own income taxes. Some city-level jurisdictions also impose additional income taxes. It’s a similar case in Canada.
Income tax rates are set by the corresponding tax authorities. Most countries in the world collect income taxes of some kind, although tax systems vary significantly by location. Two of the most common tax systems are progressive taxes and flat taxes. In a progressive tax system, tax rates increase as income increases. Many countries use progressive tax rates for individual income taxes.
Flat taxes are calculated at a set rate. Some countries and jurisdictions, such as Bulgaria, have flat tax rates on personal income, but flat tax rates are more often levied on businesses.
What Is Income Tax Used For?
Income taxes are used for a variety of purposes, but it varies by location. Generally speaking, income taxes are used to fund governments so they can provide public goods and services, military and defense personnel, healthcare, and more.
What Are the Different Types of Income Tax?
Income taxes come in two types: personal (or individual) and corporate. Let’s take a closer look at each.
Personal Income Taxes
Personal income tax, or individual income tax, are taxes levied on an individual’s earned income. The total amount of taxed income is typically a person’s annual earnings minus any credits or exemptions. Taxable income usually includes earnings from employment (i.e., employment taxes), pensions, property sales, and any other sources of income.
Corporate Income Taxes
Corporate income tax refers to the taxes that governments collect from businesses located within their jurisdiction. The amount owed will depend on what type of business it is, how much revenue it brings in, and how many employees it has working for them at any given time. Like personal income taxes, corporate income taxes vary depending on several factors, including location and type of business involved.
How Are Income Taxes Levied Around the World?
Every country has its own tax systems and laws. Countries typically levy income taxes at the national level, but many regional governments also levy additional taxes.
National Income Taxes
National income taxes are collected by the central government, while local income taxes are collected by state or provincial governments. The majority of countries and territories levy income taxes at the national level. However, several countries don’t have income taxes altogether. Some countries with no income taxes include The Bahamas, St. Kitts & Nevis, the United Arab Emirates, and others.
Local Income Taxes
Local income taxes are imposed by municipalities and are varied based on location. These taxes are generally used to fund things that benefit the community as a whole — parks, public education, infrastructure improvement, and more. Local taxes are largely dependent on a number of factors and are usually state, county, province, or city-specific. Not every state or country has local income taxes, so be sure to check local regulations to find out how your business and employees are impacted.
What Is an Income Tax Return?
An income tax return is a document that an individual or business uses to record their income and claim deductions. The main purpose of an income tax return is to determine how much money you owe or are owed from the government. It also provides information about your financial situation so that your taxing authority ensures that the correct amount in taxes is paid.
How to Calculate Income Tax
How you calculate income tax will largely depend on two factors: whether you’re calculating for an individual or a business, as well as the taxpayer’s location. As an employer, you’re responsible for withholding the appropriate amount of income tax from employee wages. Because tax rates vary by location, it can be helpful to use an employment cost calculator when calculating payroll to help determine rates for a specific jurisdiction.
However, if you’re looking to hire abroad, you might want to consider partnering with a global employment or payroll provider who can do this on your behalf. This helps simplify the complex task of international payroll processing.
Pay Your International Hires Compliantly with Omnipresent
Tax compliance can be a challenging but necessary task for any employer, especially when you want to tap into a global talent pool. But working with a global employment partner like Omnipresent makes processing personal income taxes and payroll easy.