Our income tax is generally based on what is known as “net income”, or total income less all allowable deductions and exemptions. Both the federal government (thru the Internal Revenue Service (the “IRS”)) and the various state and local governments assess an income tax and require annual income tax returns, provided you have nexus. These returns are due anywhere from three to five months after the year-end and you may generally obtain an extension to file these tax returns for up to six months. Though the filing date of returns may be extended, you may not, however, extend the date for the payment of tax.

The federal government and many states have what is known as a “graduated income tax”, which means that the more you make, the higher the rate of tax will be. As an example, an individual making only $10,000 may pay at a tax rate of 10%, whereas someone making $500,000 may pay a rate of 35% tax.

The government will not wait until you file your tax return to collect its tax. During the year, you will need to pay in towards your income tax liability. Employees have tax withheld directly from their paychecks. Businesses and self-employed individuals must calculate their estimated income tax liabilities and pay them on a quarterly basis. There are a number of safe harbors for estimating taxes, and the failure to meet them will result in estimated tax penalties.

If you have nexus in more than one state, you will need to file tax returns there and allocate your income. This generally doesn’t dramatically increase your overall tax burden, but rather divides the pie up among several states via a system of tax credits.