How to Compute an Income Tax Rate

Compute effective tax rate to determine your tax rate for the year.

The United States uses a tax system that taxes money at different rates. The Internal Revenue Service discloses the tax rate on a set of money using tax brackets. While this is useful for computing taxes due, companies and individuals will use an effective tax rate calculation to determine their tax rate. The effective tax rate is a hypothetical tax rate the company or individual paid if there was only one applicable tax rate.

Instructions

1. Determine the company's net income before tax or the individual's net income before tax for the year. A company keeps net income on its income statement. An individual's net income is the total amount of wages the individual earned during the year. For example, a company has a net income of $500,000.

2. Determine the total amount of tax paid during the year. In the example, the company paid $150,000 in taxes. Companies will disclose their taxes paid on their income statements. Individuals can find their taxes paid on their individual tax returns.

3. Divide the amount of taxes paid by the net income before taxes. This will calculate the company's or individual's effective tax rate for the year. In the example, $150,000 divided by $500,000 equals 0.3, or 30 percent. This means that on all income, the company would have paid 30 percent in taxes.

References

• Investopedia: Profitability Indicator Ratios--Effective Tax Rate
• Money Chimp: Tax Brackets