Provisional Tax: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
Provisional tax refers to a system of paying income tax in advance, through a series of installments, based on the estimated income for the upcoming tax year. This tax is calculated using the actual income earned in the previous year as a basis for estimation. Provisional tax is not a separate tax; rather, it is an advance payment that contributes to your total tax liability for the year. By spreading the tax payments throughout the year, provisional tax helps prevent a large tax bill at the end of the tax year.
Legal Use & context
Provisional tax is commonly used in income tax law, particularly for self-employed individuals and businesses. It is an essential part of the pay-as-you-earn (PAYE) tax collection system. Users can manage their provisional tax payments through various forms and procedures, often utilizing legal templates available from resources like US Legal Forms to ensure compliance with tax regulations.
Real-world examples
Here are a couple of examples of abatement:
For instance, if a freelancer earned $50,000 in the previous year and expects to earn $60,000 this year, they would calculate their provisional tax based on the anticipated income of $60,000. They would then make payments in two installments during the year.
(Hypothetical example) A small business owner who earned $100,000 last year projects their income to increase to $120,000 this year. They would pay provisional tax based on this estimated income.