Income tax represents a primary source of revenue for governments, and it is calculated based on an individual's or entity's income over a specific period, typically a fiscal year. Individuals pay income tax on wages, salaries, investments, and other sources of personal income, whereas businesses are required to pay income tax on their profits. Tax rates and regulations can vary widely between jurisdictions and often consider factors such as filing status, income level, and eligible deductions.

For individuals, income tax may be deducted directly from paychecks through withholding and reconciled annually while filing tax returns. For example, an employee may earn a monthly salary and find that a portion of it is withheld as income tax, with the remaining balance distributed as take-home pay. Businesses, on the other hand, calculate their income tax liabilities based on net income after accounting for authorized business expenses, such as operating costs or depreciation.

Governments use the funds collected from income tax to support essential services such as healthcare, education, infrastructure maintenance, and national defense. The importance of compliance with income tax regulations cannot be understated, as failing to accurately report income or pay taxes owed can lead to penalties or legal consequences.