Discover what Tax Freedom Day can tell you about your business's finances.
Tax Freedom Day is the day when the country has theoretically earned enough money to pay off its annual tax bill. Every dollar of income is counted and compared to every dollar taxed by the government. Once the income earned reaches the amount of tax due for the year, it is considered Tax Freedom Day. In the U.S., Tax Freedom Day fell on April 16 in 2019, which was the 106th day of the year.
"Prior to Tax Freedom Day – in a theoretical sense at least – all of [people's] earnings have ended up in various government coffers at the federal, state and municipal levels; and thus, determining the date of Tax Freedom Day each year can help average citizens visualize the nation's total tax burden," said Timothy Wiedman, a retired associate professor of management and human resources at Doane University.
According to data from the Tax Foundation, which calculates Tax Freedom Day, Americans will pay $5.29 trillion in taxes this year, with $3.42 trillion coming from federal taxes and $1.86 trillion coming from state and local taxes. That's 29% of national income, according to the organization.
To calculate when Tax Freedom Day falls, divide the country's federal, state and local taxes by total income. Multiply the resulting number by 365 to determine how many days into the year Tax Freedom Day falls. If you get a decimal, which you almost certainly will, round up. For example, if you get 107.1 days, Tax Freedom Day falls on the 108th day of the year, which would have been April 19 this year. Leap days are excluded from calculations for accurate year-to-year comparisons. Below shows this year's calculation:
$5.29 trillion / 18.24 trillion = 0.29 or 29% x 365 = 105.85 days = 106th day of the year or April 16
Changes in legislation also affect annual comparisons. According to the Tax Foundation, Tax Freedom Day came about five days earlier in 2018 and 2019 than in 2017. This is largely credited to the implementation of the Tax Cuts and Jobs Act.
How did Tax Freedom Day start?
Dallas Holstetler, a Florida businessman, created the concept of Tax Freedom Day in 1948. Until 1971, Holstetler did all the math himself as he kept tabs on his creation for over two decades. Then, Holstetler retired and passed along the intellectual property to the Tax Foundation, which has performed the calculation ever since. The calculations for each of the 50 states began in 1990 and has continued for the nearly three decades since.
When is my state's Tax Freedom Day?
According to the Tax Foundation, each individual state's Tax Freedom Day is determined when the state's taxpayers "have collectively earned enough money to pay off their federal, state and local taxes for the year." The calculation is similar to the calculation for the country; however, some additional factors are included on a state-by-state basis. While these dates vary each year, the 2019 dates for each state are included below.
- March 25: Alaska
- March 30: Oklahoma
- April 4: Florida and Louisiana
- April 5: Alabama, Tennessee and Texas
- April 6: Idaho and Montana
- April 7: South Dakota and Georgia
- April 8: New Mexico and Arkansas
- April 9: Arizona, Indiana, Mississippi, Missouri and Wyoming
- April 10: Kentucky, South Carolina and West Virginia
- April 11: North Carolina and Utah
- April 12: Delaware and Nebraska
- April 14: Colorado and Ohio
- April 15: Iowa and Kansas
- April 16: Michigan, Pennsylvania and Virginia
- April 18: Nevada and Oregon
- April 19: Maryland, New Hampshire and Wisconsin
- April 20: California, Maine and Washington
- April 21: North Dakota
- April 22: Vermont
- April 23: Hawaii and Massachusetts
- April 24: Illinois
- April 25: Connecticut, Minnesota and Rhode Island
- April 30: New Jersey
- May 3: New York and Washington, D.C.
Knowing when your state's Tax Freedom Day falls gives you a better understanding of when you might want your business to reach its own Tax Freedom Day. A business in Alaska might earn more income than it has to pay in taxes by late March, while it can easily take a business in New York until early May to see its Tax Freedom Day. These specific dates give more context to businesses than the national date. It's worth noting that the Tax Foundation changed how it calculates each state's Tax Freedom Day in 2018, so comparing the most recent data to previous years won't yield accurate insights.
When is my business's Tax Freedom Day?
Your business's Tax Freedom Day varies. Each individual business brings in different amounts of money and owes differing amounts in taxes. Calculating your Tax Freedom Day depends on your specific business. Regardless of when the day occurs, it's a good idea to monitor when it does. If it's showing up well after your state's Tax Freedom Day, you might want to take a closer look at why your income is taking so long to overtake your taxes owed.
"For small businesses, Tax Freedom Day is especially relevant, because taxes tend to impact them much more than a large corporation," said Chane Steiner, CEO at Crediful. "If a small business is struggling to reach their Tax Freedom Day early in the year, then it may be a sign to alter payout or accounting practices accordingly."
When is my personal Tax Freedom Day?
Much like for individual businesses, this varies based on where you live, how much income you make and other factors.
"Tax Freedom Day is important to individuals because it lets them calculate the impact that taxes are having on their life," Steiner said. "The further into the year someone's Tax Freedom Day is, the greater the impact taxes are having on their finances."
To get a better sense of what you can change to reach Tax Freedom Day earlier in the year, consider speaking with a financial professional. Legal advice from an advisory firm or an investment advisor can help you and your business get a better sense of what you can legally do to reduce your taxes and reach Tax Freedom Day in a more reasonable timeframe.
Some people opt to connect with a registered investment advisory, or RIA, in their area. Speaking with a registered investment advisor can help you distribute wealth more effectively to increase your income, which helps speed up when your Tax Freedom Day occurs. Investment advisors cost money, but using an investment advisor or financial planner might be worth the money to track your finances more effectively.
The bottom line
What is Tax Freedom Day? Know that it's the day each year when people in a country theoretically earn enough money to pay off their taxes. There's one national day for this, but dates vary for each state, business and individual. The concept was created in 1948, and the calculation has been completed by the Tax Foundation every year since 1971. Each state's Tax Freedom Day began being calculated in 1990. If you're alarmed by your business's or personal Tax Freedom Day, consider speaking with a financial professional like an investment advisor to help increase your income.