Accounting Tutorials
 Income Statement
 Income Statement  Top Examples  Template  Format  Analysis
 Income Statement Basics
 Income Statement Examples
 Income Statement Formats
 Income Statement Template
 Income Statement Formula
 Multi Step Income Statement
 Profit and Loss Statement Template
 Profit And Loss Statement Format
 Book Profit
 Contribution Margin Income Statement
 Sales Revenue
 Net Sales Formula
 Variable Costing Income Statement
 Pro Forma Income Statement
 Purpose of Income Statement
 Income from Operations Formula
 Cost of Goods Sold
 Cost of Goods Manufactured (COGM)
 COGS Formula
 Cost of Goods Sold Examples
 Cost of Sales Formula
 SG&A Expenses (Selling, General & Administrative)
 Interest Expense Formula
 List of Operating Expenses
 Non Operating Income
 Pretax Income (Earnings Before Taxes)
 Income Tax Expense
 Income Tax Accounting
 Earned Income
 Average Total Cost Formula
 Gross Profit
 Gross Profit Formula
 Direct Costs
 Indirect Costs
 Prime Cost
 Duty vs Tariff
 EBITDA
 EBITDA Calculation
 Adjusted EBITDA
 EBIT (Earnings Before Interest and Tax)
 EBIT Calculation
 Net Operating Income
 Operating Income
 Turnover vs Profit
 Operating Profit vs Net Profit
 Net Income Formula
 EBITDA Formula
 Operating Expense (OPEX)
 Operating Expense Examples
 Interest Expense
 LTM EBITDA
 NOPAT
 Non Recurring Items
 EBIT vs EBITDA  Top Differences  Examples  Calculation
 Depreciation – Formula  Types  Most Comprehensive Guide
 Depreciation Expense Formula
 Depreciation Rate
 Straight Line Depreciation Method Formula
 Accumulated Depreciation Formula
 MACRS Depreciation
 Depreciation Tax Shield
 Accelerated Depreciation
 Written Down Value Method
 Depletion Expense
 EBITDA vs Operating Income
 Straight Line Depreciation Method
 Sum of Year Digits Method of Depreciation
 Declining Balance Method of Depreciation
 Land Depreciation
 Double Declining Balance Method
 Amortization of Intangible Assets
 Depreciation vs Amortization
 Unrealized Gains (Losses)
 Non Cash Expense
 Warranty Expense
 Other Expenses
 Accrued Income
 Share based compensation
 Restructuring Cost
 Extraordinary Items
 Interest Income
 Lease Payment
 Financing Costs
 Effective Tax Rate Formula
 Progressive Tax
 Taxable Income Formula
 Completed Contract Method
 Tax Shield Formula
 Double Taxation
 Marginal Tax Rate
 Tax Haven
 Net Loss
 ProForma Earnings
 Margin vs Profit
 Net Operating Loss (NOL)
 Tax Loss Carry Forward
 Tax Loss Harvesting
 Tax Shield
 Sundry Expenses
 Trade Discount
 Trade Discount vs Cash Discount
 Percentage of Completion Method
 Interest vs Dividend  Top 9 Differences (with Infographics)
 EBITDA vs Net Income
 EBIT vs Net Income
 EBIT vs Operating Income
 Above the Line vs Below the Line
 Operating Income vs Net Income
 Cost vs Expense
 Expense vs Expenditure
 Accounting Profit vs Economic Profit
 Income Tax vs Payroll Tax
 Tax credits vs Tax deductions
 Tax Evasion vs Tax Avoidance
 Sales Tax
 Excise Tax
 Indirect Tax
 Direct Tax vs Indirect Tax
 Tax Lien
 Value Added Tax (VAT)
 Ad Valorem Tax
 Estimated Tax
 Proportional Tax
 TaxExempt
 Marginal Tax Rate Formula
 Regressive Tax
 Regressive Tax Examples
 Gross Income vs Net Income
 Profit vs Revenue
 Revenue vs Earnings
 Revenue vs Net Income
 Revenue vs Income
 Profit vs Income
 Revenue vs Sales
 Revenue vs Turnover
 Capitalization vs Expensing
 Income Statement vs Balance Sheet  Top 5 Differences You Must Know!
 Statement of Comprehensive Income  Items  Colgate Example
 Variance Analysis
 Other Comprehensive Income
 Partial Income Statement
 Income Summary Account
 FOB Destination
 Explicit Cost
 Implicit Cost
 Direct cost vs Indirect Cost
 Fixed Cost
 Fixed cost vs Variable cost
 Price vs Cost
 Hard Cost vs Soft Cost
 Overhead Costs
 Nopat vs Net Income
 Marginal Costing vs Absorption Costing
 Marginal Cost Formula
 Margin vs Markup
 Markup Formula
 Contribution Margin vs Gross Margin
 Accounting Basics (80+)
 Bookkeeping (52+)
 Balance Sheet (30+)
 Assets (109+)
 Liabilities (68+)
 Shareholders Equity (91+)
 Cash Flow Statement (17+)
 Accounting Careers (27+)
 Accounting Books (8+)
 Budgeting in Finance (31+)
Related Courses
Effective Tax Rate Formula (Table of Contents)
What is the Effective Tax Rate Formula?
The term “effective tax rate” refers to the average taxation rate for an individual or a corporation. The formula for the effective tax rate for an individual is calculated by dividing the total tax expense by the taxable income which is mathematically represented as,
On the other hand, the formula for the effective tax rate for a corporation is calculated by dividing the total tax expense by the earnings before tax (EBT) which is mathematically represented as,
Since EBT is effectively net income plus total tax expense and as such the above formula can be modified as,
Effective Tax rate _{Corporation} = Total tax expense / (Net income + Total tax expense)
Explanation of the Effective Tax Rate Formula
The formula for the effective tax rate for an individual can be derived by using the following steps:
Step 1: Firstly, determine the total expense of the individual from the income tax filing submitted.
Step 2: Next, determine the taxable income of the individual and it can be computed by subtracting total exemptions and total deductions from the gross total income of the individual.
Taxable income = Gross total income – Total exemptions – Total deductions
Step 3: Finally, the formula for the effective tax rate of the individual is calculated by dividing the total tax expense by the taxable income as shown above.
4.9 (1,067 ratings)
The formula for the effective tax rate for a corporation can be derived by using the following steps:
Step 1: Firstly, determine the total expense of the corporation which will be easily available as a line item just above the net income in its income statement.
Step 2: Next, determine the net income of the corporation which will also be available as a line item in the income statement. The EBT can be calculated by adding the total tax expense to the net income.
EBT = Net income + Total tax expense
Step 3: Finally, the formula for the effective tax rate of the corporation is calculated by dividing the total tax expense by its EBT as shown above.
Tax rate _{Corporation} = Total tax expense / (Net income + Total tax expense)
Examples of Effective Tax Rate Formula (with Excel Template)
Let’s see some simple to advanced examples of Formula to understand it better.
Example #1
Let us determine the tax rate for an individual with taxable income of $600,000 under the following hypothetical progressive tax regime.
As per above table,
 Total tax expense = $100,000 * 10% + $200,000 * 15% + $200,000 * 25% + $100,000 * 35%
 = $125,000
Therefore, the calculation of this formula will be as follows
 Effective Tax Rate Formula = Total tax expense / Taxable income
 = $125,000 / $600,000
 Tax Rate = 20.83%
Example #2
Let us take the example of John to understand the calculation for the effective tax rate. John joined a bank recently where he earns a gross salary of $200,000 annually. While filing for his income tax returns his accountant informed him that he is eligible for tax exemption worth $20,000 and deductions worth of $25,000. Calculate the tax rate if his total income tax payable as per IT filing is $45,000.
Use the following data for the calculation of the Effective Tax Rate Formula.
Taxable income
 Taxable income = Gross salary – Deductions – Tax exemptions
 = $200,000 – $25,000 – $20,000
 = $155,000
Therefore, the calculation of tax rate is as follows,
 Tax Rate = $45,000 / $155,000
Tax Rate will be –
 Tax Rate = 29.03%
Therefore, the tax rate for John is 29.03%.
Example #3
Let us take the reallife example of Apple Inc.’s annual report as on Sep 24, 2016, Sep 30, 2017, and September 29, 2018. The following information is available.
For the calculation of Effective Tax Rate, we will first calculate the EBT as follows –
EBT for Sep 24, 2016
 EBT = Net income + Total tax expense
 =$45,687 + $15,685
 =$61,372
Similarly, we will calculate the EBT for 2017 and 2018.
After calculating EBT, we will do the calculation of Effective Tax Rate as Follows –
Calculation of Effective Tax Rate for Sep 24, 2016, will be as follows –
Tax Rate for Sep 24, 2016, will be –
 = $15,685 Mn / $61,372 Mn
 = 25.56%
Similarly, we will calculate the Tax Rate for 2017 and 2018.
Calculator
You can use the following calculator.
Total Tax Expense  
Taxable Income  
Effective Tax Rate Formula  
Effective Tax Rate Formula = 


Relevance and Use
It is very important to understand the concept of effective tax rate because it is one metric that can be used by the investors as a profitability indicator of a company. However, the rate may fluctuate dramatically from year to year due to the taxable income falling into different tax slabs in a progressive tax regime. Otherwise, it is difficult to straightaway assess the reason behind a sudden jump or drop in the tax rate. For example, the change in the tax rate may be due to asset accounting manipulation by the company intended to reduce the tax burden. Nevertheless, the tax rate is a good indicator of the tax burden imposed by the government.
Recommended Articles
This has been a guide to Effective Tax Rate Formula. Here we discuss how to calculate Effective Tax Rate for the Individuals and the Corporation along with the practical examples and downloadable excel sheet. You can learn more about accounting from the following articles –