The tax burden refers to the total share of your income or resources that goes toward paying taxes. It includes federal taxes, state taxes, payroll taxes, sales taxes, property taxes, excise taxes, and other mandatory payments.
In simple terms:
Your tax burden shows how much taxes actually cost you.
Governments use taxes to fund public services, but the “burden” varies widely depending on income, location, business structure, and the type of tax applied.
Why Understanding Your Tax Burden Matters
Most taxpayers only look at their annual tax return. But your real tax burden includes:
The IRS calls this the Taxpayer Burden, and it includes both financial and compliance burden. With continuous efforts toward Taxpayer Burden Reduction, the IRS aims to simplify forms, reduce paperwork, and lower compliance costs for individuals and businesses.
Key Factors That Affect Your Tax Burden
1. Income Level
Income directly impacts how taxes apply. Higher earners often face a higher tax burden due to progressive tax brackets.
2. Filing Status
Married filing jointly, single, or head of household—each status changes your tax bracket and ultimately your tax burden.
3. Deductions and Credits
Deductions lower taxable income while credits lower tax liability. Smart use of both can significantly reduce your burden of tax.
4. Type of Tax
Your tax burden doesn't come from one source. It may include:
5. State Tax Burden
State tax burdens vary dramatically. Some states have high income tax but low sales tax. Others have no income tax but high property or consumption taxes.
This is a major content gap in many blogs, so here’s what actually matters:
-
High tax burden states often include CA, NY, NJ, CT, IL
-
Low tax burden states include WY, FL, SD, TN, TX
Businesses expanding across states should analyze state tax burden ratios before relocating or opening a new office.
6. Business Structure
LLC, S-Corp, C-Corp, or sole proprietorship—each structure affects your tax burden differently.
How to Calculate Tax Burden (Step-by-Step)
Calculating tax burden is easier than it seems. Here's a simple approach:
Step 1: Determine Total Taxable Income
Include:
-
Wages and salaries
-
Business income
-
Interest and dividends
-
Rentals
-
Capital gains
Subtract allowable deductions to calculate taxable income.
Step 2: Identify Your Federal and State Tax Rates
Progressive tax brackets apply at both federal and state levels.
Step 3: Calculate Total Taxes Paid
Add up:
Step 4: Apply the Tax Burden Ratio Formula
Tax Burden Ratio = (Total Taxes Paid ÷ Total Income) × 100
This tells you the actual percentage of your income going toward taxes.
Step 5: Calculate Effective Tax Rate
Your effective tax rate reflects your real tax burden.
It often differs from your marginal bracket, especially if credits and deductions reduce the final amount.
Examples of Tax Burden Calculation
Individual Example
Income: $120,000
-
Total taxes paid (federal, state, payroll, property): $28,500
Tax Burden Ratio = 28,500 ÷ 120,000 × 100 = 23.75%
Business Example
-
Net business income: $500,000
-
Total taxes paid: $110,000
Tax Burden Ratio = 22%
These examples help you understand where your money is going and how decisions impact your tax responsibility.
IRS Initiatives on Taxpayer Burden Reduction
Many blogs miss this angle, but it's crucial.
The IRS actively works to reduce taxpayer burden by:
These changes directly affect how businesses calculate their tax burden and plan compliance workflows.
Source used: IRS: Taxpayer Burden Reduction (Small Business & Self-Employed).
How to Reduce Your Tax Burden
1. Strategic Tax Planning
Plan taxes throughout the year, not just during filing season.
2. Maximize Deductions
Track business expenses, depreciation, home office deductions, and employee benefits.
3. Use Tax-Advantaged Accounts
-
Retirement plans
-
HSAs
-
Education savings
4. Invest Tax-Efficiently
Evaluate capital gains strategies and long-term investment options.
5. Choose the Right Business Structure
S-Corp vs C-Corp vs LLC can make a big difference in tax load.
6. Work With Tax Experts
Global FPO helps CPA firms, accounting practices, and businesses reduce tax burden through strategic planning and compliance support.
Final Thoughts
Knowing your tax burden helps you understand how taxes affect your financial health. With smarter planning, awareness of state tax burdens, and support from experienced professionals, you can reduce unnecessary tax pressure and improve your financial outcomes.
If you want help assessing or lowering your tax burden, Global FPO is here to support you with expert tax consulting, compliance management, and outsourced accounting solutions.
Frequently Asked Questions (FAQ's)
What is a tax burden in simple words?
It’s the share of your income that goes toward paying taxes, including federal, state, local, and payroll taxes.
How do you calculate a tax burden?
Use the formula:
Tax Burden = Total Taxes Paid ÷ Total Income × 100
What is the state tax burden?
It refers to the total taxes residents or businesses pay within a state, including income, sales, and property taxes.
What affects the burden of the tax the most?
Income level, deductions, credits, tax structure, and your state’s tax system are the biggest factors.
Is tax burden the same as effective tax rate?
They are closely related. Effective tax rate shows the true share of taxes paid, while tax burden includes all taxes combined.
How can businesses lower their tax burden?
Through tax planning, expense tracking, entity restructuring, and professional tax consulting.
+61 (485) 921-100
+1 (347) 781-5928
+44 (7700) 170-900
contact@globalfpo.com