Marginal income and marginal income tax sound similar, but they refer to vastly different concepts. If you run a business, you should understand the basic differences between these two terms. Manufacturing and production businesses, in particular, need to understand what marginal income means.
Marginal income refers to the difference between sales revenue and variable costs. For example, if your company sells $100,000 worth of products and has $40,000 in variable costs, it has $60,000 in marginal income. Variable costs represent production costs that change. This can include manufacturing supplies and energy costs that differ from month to month but not fixed costs, such as rent, business insurance, and administrative payroll, that typically stay the same. Businesses have the option of tracking their total marginal income, or they can break down these amounts to focus on the marginal income associated with specific products. This individual focus often proves a useful way to track and compare the profitability of different items your company makes or sells.
Marginal Income Tax
In contrast, marginal income tax basically refers to tax brackets. To clarify, the Canada Revenue Agency (CRA) applies income tax at different rates depending on the amount of income. For example, as of 2018, individual taxpayers pay 15% of taxable income up to $46,605, but they also pay 20.5% income tax on taxable income between $46,605 and $93,208. The rate continues to increase progressively with higher amounts of income. Marginal income tax doesn’t refer to the final or effective tax rate of individuals or businesses. It only refers to the rate assessed on income in each bracket.
Running a small business requires you to navigate all kinds of financial concepts. When you understand the differences between marginal income and marginal income tax rates, you can better communicate with accountants, lenders, and financial professionals concerning your business’s needs. QuickBooks Online offers a variety of tutorials that help you learn as you record and track your company’s revenue and expenses, and it can also help you maximize your tax deductions. Keep more of what you earn today.