Taxes are a non-negotiable part of conducting business.
Unfortunately, taxes can be overwhelming, especially for corporations. For one thing, the tax code changes a little bit each year, and then there are all the different types of taxes that apply to a business: corporate income taxes, business franchise taxes, industry-specific taxes, and more.
In this guide, we’ll cover the essentials of corporate taxation, including the corporate income tax and other taxes you’ll likely need to pay.
Most individuals can recall the all-too-familiar tax day, April 15. However, for corporations, this isn’t the only tax day. The IRS requires that many corporations (but not all) pay taxes on a quarterly basis — if you don’t, you could be subject to underpayment fees. Typically, corporations need to make estimated payments throughout the year if they expect to have a total tax burden of $500 or more.
To pay each tax quarter on time, you’ll need to pay by the 15th day of the month that closes the quarter. The one truly bizarre aspect of estimated taxes is that only the first and third quarters are actually three months long, while the second “quarter” is just two months and the fourth spans four months.
This means taxes are due on the 15th of April, June, September, and January. However, if any of those dates fall on a weekend or holiday, you can push your payment back to the next business day.
As you can imagine, there are a wide variety of taxes that each corporation may need to pay. The exact requirements will vary from one state to another, but in this section, we’ll give you a flyover of the taxes you can expect to pay.
Corporate income taxes are levied on both the state and federal level. The federal rate used to be 35%, but today it’s 21%, due to the Tax Cuts and Jobs Act of 2017 which slashed this tax to its lowest rate since the 1930s. Even with the much lower rate, many entities manage to find loopholes to pay even less, typically in the 18% range. For more information on federal taxes, you can consult the IRS’s Tax Information for Corporations.
The state-level rates vary greatly depending on where you conduct business. If you operate exclusively in one state, you’ll pay just that state’s tax, but multi-state corporations will pay taxes for each state. Not all states levy the same percentage, however.
For instance, Iowa has a corporate income tax of 12%, while North Carolina charges 2.5%, and other states fall somewhere in between. Some states levy what’s referred to as a gross receipts tax instead of the corporate income tax, and a few states even charge both a gross receipts tax and a corporate income tax.
South Dakota and Wyoming are the only states that don’t have these taxes at all.
Almost every state requires a sales tax, although thankfully there is no federal sales tax. Basically, if your business is involved in the sale of a good or service, you’ll need to collect sales tax. If you don’t charge the tax to your customers (the industry standard), then you’ll need to pay it yourself.
In some states, you also need to apply for a seller’s permit as part of the process for collecting and paying sales tax. The seller’s permit often needs to be displayed in a visible location in your store.
If you’ve chosen a corporation as your business entity type, then it’s more than likely that you have employees. As a result, you’ll need to pay several taxes required of an employer. Again, many of these taxes vary based on your state.
For example, you’ll need to make employee income withholding tax payments, which is required on both the state and federal levels. Essentially, you need to hold back a portion of each employee’s wages and forward that money to the government, and any funds that exceed the actual tax due will be refunded to the employee at tax time. As the employer, it’s your responsibility to make these payments on a timely basis.
You’ll also need to pay taxes such as unemployment insurance taxes, Medicare taxes, Social Security taxes, and more. Detailing the requirements of each tax would make this section extremely long, so if you want to learn more, you can check out the IRS guide to employment taxes.
Industry taxes are usually levied on the state level, although there are a few on the federal level as well. At the very least, most states charge an alcohol and liquor tax, as well as a cigarette tax.
Beyond that, there’s a huge level of variance between states, so you should check with your state to make sure you have all your bases covered regarding industry-specific taxation requirements.
Paying taxes is a touch more complicated than just filling out the required forms. In this section, we’ll cover some of the essentials of paying your taxes.
Calculating deductions is a tax-time necessity. Here’s why: unlike individual taxes, which are based on gross income, the corporate tax is based on net income. Basically, you’ll be taxed on profits, not the raw dollar amount that passes through your corporation.
As a result, you can deduct certain expenses, which include employee benefits, employee wages, business expenses, and more. For more information on deductible expenses, look here.
These deductions explain how some newer businesses avoid paying corporate income taxes for several years — they “spent” all their taxable profits by reinvesting in the business itself, so when tax time came, these businesses had no net income left to tax.
For this step, you’ll make some predictions about the amount of net income you expect to make. Understandably, you cannot predict this income perfectly, but you will only be penalized for underpayment if there’s a significant difference between your estimated income and your actual income.
Make these tax payments once every quarter (dates listed above). If you don’t, you could be charged a tax underpayment fee, and if you end up overpaying these estimated taxes because your income is not as high as you anticipated, don’t worry. You’ll get your money back on your tax refund.
Of course, to make these payments, you’ll need to use the correct forms. You can use IRS Form 1120 for federal corporate income taxes. Please note that corporations with more than 250 annual returns or assets that exceed $10 million are required to file online with the IRS. Then, for state income taxes, check your state’s tax website (usually the Department of Revenue) for the forms you need.
The core issue of corporate taxation hinges on the distinction between a C corporation and an S corporation. While there are many technicalities that distinguish the two, here are the basics.
A C corporation is the most common corporation type. C corporations have no limit on the number of shareholders they can have, but their tax burden is fairly significant because they fall under double taxation. With double taxation, a corporation pays income taxes on its net profits, then the shareholders pay taxes on the distributions and/or capital gains they receive from the corporation. Therefore, the same funds are technically taxed twice.
S corporations, however, are only taxed once. These corporations are considered pass-through entities, which means that the corporation itself does not pay taxes. Instead, the shareholders report a percentage of the business income on their individual tax returns. How much each shareholder reports is dictated by the percentage of shares they have, and as a result, the corporation is only taxed once. However, not all corporations qualify to be S corporations, because the requirements are pretty strict: the business may have no more than 100 shareholders, issue only one class of stock, etc.
Corporate taxation can be both confusing and overwhelming. This guide should take away some of that confusion. However, it’s important to note that no two corporations are exactly alike, and they won’t be taxed in exactly the same manner, either.
To get the best advice on how to handle your corporation’s unique taxes, it’s highly recommended that you get advice from an accountant or a tax attorney. With the expertise of these professionals, you can handle your corporate taxes compliantly and effectively.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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