how to calculate effective tax rate
The effective tax rate is just your average tax rate: total tax divided by total income, expressed as a percentage.
Simple formula
For individuals (or corporations) the core formula is:
Effective tax rate=Total tax paidTaxable income×100\text{Effective tax rate}=\frac{\text{Total tax paid}}{\text{Taxable income}}\times 100Effective tax rate=Taxable incomeTotal tax paid×100
- Total tax paid = your actual tax liability for the year (after credits).
- Taxable income = your income after deductions, exemptions, and adjustments.
Many corporate/finance sources use pre‑tax income (EBT) instead of “taxable income” when analyzing companies:
Effective tax rate=Income tax expense (taxes paid)Pre‑tax income (EBT)×100\text{Effective tax rate}=\frac{\text{Income tax expense (taxes paid)}}{\text{Pre‑tax income (EBT)}}\times 100Effective tax rate=Pre‑tax income (EBT)Income tax expense (taxes paid)×100
This is how it’s commonly calculated from an income statement.
Step‑by‑step: individual example
Imagine:
- Taxable income: 70,000
- Total tax (from your return): 11,017
Then:
- Divide tax by income: 11,017÷70,000≈0.15711{,}017÷70{,}000≈0.15711,017÷70,000≈0.157.
- Convert to percent: 0.157×100≈15.7%0.157×100≈15.7%0.157×100≈15.7%.
So your effective tax rate is about 15.7%.
Step‑by‑step: business example
From a company income statement:
- Pre‑tax income (EBT): 100,000
- Income tax expense: 20,000
- Divide: 20,000÷100,000=0.2020{,}000÷100{,}000=0.2020,000÷100,000=0.20.
- Convert to percent: 0.20 × 100 = 20%.
The company’s effective tax rate is 20%.
Key points vs marginal rate
- Effective tax rate = average rate on your whole income.
- Marginal tax rate = rate on your last dollar (top bracket).
- Because of progressive brackets, your effective rate is usually lower than your highest bracket.
HTML table: quick reference
| Scenario | Formula | Inputs needed | What it tells you |
|---|---|---|---|
| Individual | Effective rate = Total tax ÷ Taxable income × 100 | [1][5]Total tax from return, taxable income after deductions | [1][3]Average share of your personal income paid in tax | [8][5]
| Business | Effective rate = Income tax expense ÷ Pre‑tax income × 100 | [10][9]Tax expense line, earnings before tax (EBT) | [9]Average tax burden on company profits | [10][9]
| Comparison to marginal | Use same formula, then compare to top bracket rate | [3][7]Effective %, marginal bracket % | [3][7]Shows gap between average and top tax rate on extra income | [7][8]
Mini story to visualize it
Think of your income as a bucket of water and each tax bracket as a different- sized cup you use to scoop out water at different rates. Your marginal rate is the rate on the last scoop. Your effective tax rate is what you get if you add up all the water taken by all cups and compare it to the whole bucket—your overall average.
Information gathered from public forums or data available on the internet and portrayed here.