The Role of Mental Accounting in Self-employed Business Owners' Tax Behavior (Case Study: Self-employed Taxpayers of Fars Province)

The business income tax is major source of tax revenues due to its importance and size. The purpose of this research is to investigate the role of mental accounting in shaping tax behavior of self-employed taxpayers. This is a survey research and the statistical population is comprised of individual taxpayers in Fars province in 2019. Hypothesis testing using R based on a sample of 184 small business owners revealed that self-employed taxpayers vary in how they use mental accounting and do tax calculations. They can be divided into segregators and integrators. Furthermore, the results revealed a significant difference between mental accounting of income tax and value-added tax (VAT). Taxpayers are more likely to segregate their mental accounts for VAT than they do for income tax. In addition, there is a positive relationship between tax knowledge and using mental accounting and a positive relationship between mental accounting and tax compliance. Therefore, it is important for the government to promote small business owners’ knowledge that can influence their mental accounting and, in turn, their tax compliance.