Tax expense is an amount owed to a government entity by an individual or business entity, based on the application of a tax rate to some unit of economic activity. This expense is used to fund the government entity. Examples of the taxes that can comprise tax expense are:
- Income tax, which applies a tax rate to income earned.
- Unemployment tax, which applies a tax rate to employee wages.
- Use tax, which apples a sales tax rate to items purchased by a business, and for which a sales tax has not already been paid.
- Head tax, which applies a tax amount to the number of individuals employed by a business that work within a government jurisdiction.
Tax expense is not the same as tax liability. A tax liability is the amount of taxes owed that have not yet been paid. A tax liability can also include taxes collected by a business on behalf of a government, and to be remitted to that government. An example of this latter case is sales taxes, which are collected by a business from its customers and then remitted to a government entity. Sales taxes are recorded as a tax expense by the buyer of the goods or services, not by the seller.