What is a Tax Liability?

Tax liability refers to the amount legally owed to a taxing authority as the result of a taxable event.

How Does a Tax Liability Work?

A tax liability might also be called a 'tax obligation.'

A tax authority -- such as a local, state or national government -- imposes taxes upon individuals, organizations and corporations to fund social programs and administrative roles. Taxable events include earning taxable income, having sales, receiving or issuing payroll, etc.. These taxes are legally binding.

The liability is generally calculated by multiplying the taxable event by the tax rate. The taxing authority has various legal options to enforce these payments.

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Why Does a Tax Liability Matter?

Taxes are important to maintaining all types of government and ruling systems. Entities can be fined, assets liquidated and even jailed for failing to pay their tax obligations.

Many entities attempt to minimize their liability each year using tax credits, donations, tax shelters and the like.

Tax havens are countries that enforce little to no tax liability.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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