Taxable income

Understanding taxable income is key to managing payroll and taxes effectively as a business owner.

Homebase Team

Min Read

What is taxable income?

Understanding taxable income is key to managing payroll and taxes effectively as a business owner. Taxable income is the portion of income that the IRS considers taxable after deductions and exemptions. For employers, it includes employee wages, bonuses, and other forms of compensation that must be reported to the IRS.

Knowing what counts as taxable income helps ensure accurate payroll reporting, compliance with federal and state tax laws, and proper employee withholding. To make things easier, Homebase payroll will file many federal, state, and local tax forms on behalf of your company.

What counts as taxable income?

Taxable income isn’t just an employee’s base salary. It includes several types of earnings, including:

Wages and salaries – Regular pay for work performed.
Bonuses and commissions – Any extra earnings beyond base wages.
Overtime pay – Compensation for hours worked beyond standard schedules.
Severance pay – Money paid to employees upon termination.
Stock options and equity compensation – Certain stock awards given to employees.
Fringe benefits – Some employer-provided perks, such as gym memberships or company cars, may be taxable.

However, not all benefits are taxable. For example, health insurance premiums paid by employers, specific retirement contributions, and some commuter benefits may be excluded from taxable income. Employers should carefully track all types of compensation to ensure proper tax withholding.

How to calculate taxable income for employees

To calculate taxable income for payroll purposes, follow these steps:

Start with gross pay – This is an employee’s total earnings before deductions.
Subtract pre-tax deductions – Health insurance premiums, 401(k) contributions, and commuter benefits reduce taxable income.
Apply payroll tax withholdings – Federal and state income tax, Social Security, and Medicare must be deducted.
Determine net pay – After taxes and deductions, the employee takes home the remaining amount.

For businesses, keeping payroll accurate is crucial for tax compliance. That’s where Homebase payroll can help. Homebase automatically calculates payroll taxes, applies deductions, and ensures your employees receive accurate paychecks every time.

Try Homebase payroll today to simplify payroll and tax management.

How taxable income affects employers

Understanding taxable income isn’t just important for employees—it affects employers in several ways:

Payroll tax obligations – Employers must withhold the correct amount of income tax and pay Social Security and Medicare taxes.
Reporting to the IRS – Businesses must file W-2 forms for employees and 1099 forms for independent contractors, ensuring all taxable income is reported.
State and local tax considerations – Taxable income rules vary by state, so employers must stay current with local tax laws.

Employers should ensure that payroll records are well-organized and up to date, as failing to report taxable income accurately can result in penalties, back taxes, and compliance issues.

How Homebase helps with payroll and tax reporting

Payroll and tax reporting can be overwhelming, but Homebase makes it easy by automatically handling calculations, tax withholdings, and filings. With Homebase payroll, you can:

Ensure accurate tax withholding for employees.
Stay compliant with federal and state tax regulations.
Automate payroll and tax payments to avoid IRS penalties.
Keep tax records organized and accessible for reporting.

Sign up for Homebase today to streamline payroll, tax reporting, and compliance—so you can focus on growing your business.

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