The effective tax rate is calculated by dividing the total tax paid by the taxable income, then multiplying by 100 to get a percentage. The formula is:
Effective Tax Rate=(Total Tax PaidTaxable Income)×100\text{Effective Tax Rate}=\left(\frac{\text{Total Tax Paid}}{\text{Taxable Income}}\right)\times 100Effective Tax Rate=(Taxable IncomeTotal Tax Paid)×100
This represents the percentage of your income that goes toward paying taxes. For example, if you paid $90,000 in taxes on a taxable income of $800,000, your effective tax rate would be:
(90,000800,000)×100=11.25%\left(\frac{90,000}{800,000}\right)\times 100=11.25%(800,00090,000)×100=11.25%
This method is used both for individuals and businesses to understand the actual tax burden relative to their income or earnings before tax.
