Effective Corporate Tax Rate Calculator

Created by Wei Bin Loo
Reviewed by Dominik Czernia, PhD and Jack Bowater
Last updated: Jan 12, 2022

Our effective corporate tax rate calculator helps you calculate the effective tax rate for a corporation. This metric will help you determine the amount of tax a company needs to pay on its earnings as a percentage of its earnings.

This article will explain what the effective corporate tax rate is and how to calculate it using the effective corporate tax rate formula. Moreover, we will also demonstrate real-life examples to help you better understand the concept.

What is the effective corporate tax rate?

The effective corporate tax rate is defined as the ratio between the income tax paid and the earnings before tax of a company. The earnings before tax are also generally seen as the company's taxable.

The effective corporate tax rate is always seen as the best metric to assess the company's tax expenses and tax liability. This is because the effective corporate tax rate is calculated using the actual tax a company pays, unlike the marginal corporate tax rate. We will explain the differences between these two metrics in detail in the section below.

Now, let's look at the calculation of the effective corporate tax rate.

How to calculate effective corporate tax rate? The effective corporate tax rate formula

Let's look at Company Alpha, which reports the following information, as an example to explain the effective corporate tax rate calculator:

  • Name: Company Alpha;
  • Country: U.S.;
  • Earnings before tax: $1,500,000; and
  • Income tax paid: $275,000.

The effective corporate tax rate calculation only requires three steps:

  1. Determine the earnings before tax (EBT)

The earnings before tax (EBT) are the earnings left after deducting the cost of goods sold, operating expenses, and interest expenses. You can usually find this information in the company's income statement.

In our example, the Company Alpha's EBT is $1,500,000.

  1. Determine the income tax paid

We define the income tax paid as the actual income tax that a company pays to the government in a given year. The company will usually include this information in its income statement. It should be above the net income generated by the company.

The income tax paid for Company Alpha is $275,000.

  1. Calculate the effective corporate tax rate

The third step is to calculate the effective corporate tax rate. We can perform the calculation using the effective corporate tax rate formula below:

effective corporate tax rate = income tax paid / EBT

Hence, the effective corporate tax rate for Company Alpha is $275,000 / $1,500,000 = 18.33%.

You can of course use our effective corporate tax rate calculator and skip all the points above.

What is the difference between marginal corporate tax rate and effective corporate tax rate?

To fully understand the effective corporate tax rate, it is essential to understand the difference between this metric and its counterpart - marginal corporate tax rate.

The marginal corporate tax rate is the tax rate applied to the last dollar of the company's taxable income. In contrast, the effective corporate tax rate is calculated based on the amount of tax the company actually paid. This is why the effective corporate tax rate is often regarded as the more accurate version of the two metrics.

For example, in a progressive tax system, companies with the same marginal corporate tax rate might have different effective corporate tax rates. The effective tax rate depends on how much the company's net income is within the top tax bracket.

FAQ

What is earnings before tax?

Earnings before tax, or EBT for short, is the earnings left after deducting the costs of goods sold, operating expenses, and interest expenses from the revenue. It is also the taxable income of a company.

What is marginal corporate tax rate?

The marginal corporate tax rate is the tax rate applied to the last dollar of a company's taxable income, which is the EBT. The marginal corporate tax rate is based on the statutory tax rate of the relevant jurisdiction.

What is net income?

The net income is the earnings left after deducting all the necessary expenses, including tax expenses. If the net income is positive, the company is considered profitable. If the net income is negative, the company is said to be making a loss.

What is the average effective corporate tax rate in the U.S.?

In 2021, the average effective corporate tax rate was 25.8% in the U.S. This is slightly higher than the global average of 23.8% in the same year.

Wei Bin Loo
Earnings before tax
$
Income tax paid
$
Effective corporate tax rate
%
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