While it is not always necessary to fully know the entire set of jargon that goes along with the sphere of taxation and accounting, it is important to at least understand the most commonly used terms in the field. As a business person or employer, it is critical to be able to navigate with ease the hoops and hurdles that income and business taxes can sometimes present. The list below will help to decipher some of the phrases you are most likely to come across when dealing with taxes, business accounting, or other financial or legal matters of importance.
The Ultimate Top Ten List
- Tax Year: A tax year is defined as the period of twelve consecutive months that determines one’s time bracket for income reporting and record keeping. Both fiscal and calendar years are considered tax years. While calendar years must necessarily run from January 1 to December 31, fiscal years may encompass any consecutive twelve-month period that ends on the last day of a month other than December. For example, September 1 through August 31 might be a fiscal year.
- Accounting Methods: This term might seem fairly self-explanatory: accounting methods are the fundamental guidelines and principles that a business uses to track its records and present its reports. However, what you need to know is that there are two main types of accounting methods, accrual basis and cash basis.
- Accrual Basis: A business that is doing its accounting on an accrual basis will take distinctive actions when it comes to income and expenses. They will deduct their expenses in the year that they occur, and they will report their income in the same year that it is earned.
- Cash Basis: In this method of accounting, income is not reported in the year that it is earned but in the year that it is paid. This is a subtle difference, but one that is very important for bookkeeping. On a cash basis, expenses are deducted in the same year that they are paid.
- Employment Tax: This type of tax is the amount that employers are required to withhold from their employees’ pay and submit to the appropriate taxation authority. This may include federal income tax, social security tax, and federal unemployment tax.
- Employer Identification Number: Most businesses are required to request an Employer Identification Number (EIN) from the federal government. It is a series of digits that identifies your business as a potentially taxable entity.
- Sales Tax: This form of tax is one that almost everyone is familiar with because most people pay it on a daily business when purchasing everything from groceries to clothing. Sales tax is one that is regulated by both state and local governments and is added on to purchases of goods and services.
- Self-Employment Tax: This tax will apply only to an individual who is self-employed and not on a payroll of any kind. It includes figures for both social security and Medicare taxes.
- Excise Tax: This kind of tax only applies to businesses or organizations who produce or distribute certain kinds of products involved with specific equipment or manufacturing facilities.
- Information Tax Return: An information tax return is one that might be filed by a business that qualifies as a partnership or limited liability company. It shares pertinent financial information with the Internal Revenue Service, but does not mean that the entity itself is subject to taxation.
These phrases are just the tip of the iceberg when it comes to language that is specific to taxation and accounting. Regardless, translating the lingo used by the Internal Revenue Service or by your accounting department should be made much easier with a basic understanding of these simple terms. The more you can comprehend, the more empowered you will be at tax time.
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