What is Tax Liability?


Tax liability is the total amount of tax that individuals and organisations owe to the federal, state, and local governments in a given time frame. Tax liabilities are short-term debts for businesses that are paid off within a year and are listed on a balance sheet. Tax obligations for people are paid either out of pocket or by withholding money from their wages or salaries.

Each taxable event, like receiving income, making sales, or paying employees, results in tax liabilities for both individuals and organisations. The total tax liability is divided by the number of taxable events to determine the specific amount of tax liability for each. Your tax liability is the total sum of money you owe to the IRS in the form of tax debt. It is the total amount of tax that you owe the government.

Taxes are due on money earned from working for a living or running a business, interest income from different investment vehicles, stock capital gains, and money earned from other sources like winning the lottery or a horse race, among others. Laws regarding the amount of tax to be charged, the exemption limit, etc. are outlined in the Indian Income Tax Act of 1961.

Understanding Tax Liability

Taxes are levied by a number of organisations, including the federal, state, and municipal governments, and the money raised is used to provide services like maintaining the military, fixing roads, and funding social programmes. Employers deduct income taxes from employees’ paychecks and transmit them to the federal government along with Social Security and Medicare contributions. You should be aware that your tax obligation extends beyond the current year. Instead, it takes into account any years with outstanding taxes. Therefore, any back taxes—that is, taxes owed from prior years—are added to your current year’s deferred tax liability.

Taxation of Capital Gains

You must pay taxes on the gain when you sell a stock, a piece of property, or any other item for a profit. You can record a capital loss if you sell it for less than you paid for it. Long-term capital gains and short-term capital gains are two separate types of capital gains that are taxed differently.

A short-term capital gain is accounted for in your income if you sell an asset for a profit after holding it for no more than a year. It is a long-term capital gain and is taxed as such if you retain an asset for longer than a year before selling it for a profit. Similar to income tax brackets, there are thresholds for capital gains.

Tax Liability for Corporations

According to corporate tax law, companies in India are required to pay taxes. A company that operates in several nations but is an Indian company is still required to pay taxes there.

Sections 90 and 91 of the Income Tax Act establish guidelines to simplify the process to prevent the inconvenience of double taxation. Corporate tax-paying entities must have their financial records audited and submit an audit report to the income tax division. Companies are required to submit audit reports.

What is your tax liability for small businesses?

Many taxable events can result in tax liability for your company. Any action that generates tax liabilities is referred to as a “taxable event,” such as receiving taxable income, making sales, or paying out payroll. The government determines which events are taxable.

You are obligated to pay the relevant tax authorities when a taxable event takes place at your place of business. Your tax obligation’s size is determined by the occurrence. In general, you can determine your tax obligation as a portion of the entire taxable event. In addition to the taxes mentioned below, you can also owe franchise or excise taxes. However, the most frequent tax liabilities that small business owners encounter are listed below.

Tax Liability on Income Earned

Federal income tax, as well as possibly state and local income taxes, must typically be paid by those who are employed. Employee wages are subject to income tax withholding by the employer. However, if you run a small business, you won’t get paid (unless you’re incorporated).

In addition, income taxes are not deducted from your earnings when you do not receive wages. Unless you are a C corporation, your obligation to pay earned income tax may also include the tax on the revenue from your business. Making estimated tax payments throughout the year is another way to pay your earned income tax debt.


The consequences of not paying attention to your tax liability can be severe. You must be aware of your deferred tax liability. Additionally, you need to have supporting documents. Records are required to calculate your tax liability and serve as proof if the IRS audits you. Taxes must be correctly collected and kept separate. For instance, every pay period, withhold payroll taxes from employees and deposit them in a different bank account.

By recording expenses and income in your small business accounting books, you can keep track of your tax liability. Keep abreast of tax regulations so that you are aware of your tax obligations. Keep copies of documents in your records as well. Keep track of the deadlines for filing your taxes. Learn about the tax deposit timetable for your company and note the deadlines on a calendar.

To gain more insights into tax, personal loans, and other financial aspects, visit the official website of Piramal Finance.