It has been said that the only two things certain in this world are death and taxes. But even though taxes are a certainty, that doesn’t make them any less confusing, especially for businesses. All types of businesses must complete several filing requirements, not least of which are corporations. In fact, according to the IRS, a corporation with assets of $10 million or more must file at least 250 returns every year; that’s a lot of tax information to keep track of.
How Corporations are Taxed
A corporation is a business that’s set up as a separate, legal entity guided by a group of officers. It has all the legal rights of a person, except for the right to vote and other limitations. Since a C corporation is recognized as a separate taxpaying entity, conducting business and distributing the profits to shareholders, those profits are taxed both to the corporation and then to the shareholders when those dividends are distributed, according to the IRS. This double tax means the corporation does not get a tax deduction for distributed dividends and shareholders can’t deduct any losses.
The Corporate Tax Rate
The corporate tax rate is the rate at which the United States taxes the profits of U.S. resident C corporations. The current tax rate is a flat rate of 21% set by the 2017 Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, which took effect Jan. 1, 2018, the rate was 35%. The corporate income tax raised $297.0 billion in fiscal 2017, accounting for 9% of total federal revenue.
Capital Gains Taxes for Corporate Shareholders
A C corporation is taxed on its corporate income and its shareholders are taxed on the dividends they receive as capital gains. The capital gains tax rate is dependent on whether those gains are short-term, owned a year or less, or long-term, more than a year.
For most individual shareholders the rate is no more than 15% but could be as less as 0% if the taxable income is less than $78,760. For those shareholders who receive more income, they may pay capital gains of 20%, according to the Balance Small Business.
What are the Taxes for S Corporations?
Unlike C corporations, which face double taxes, S corporations pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes, according to the IRS. The shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates depending on their tax bracket. Because of this, S corporations avoid double taxes on corporate income and are just responsible for the taxes on certain built-in gains and passive income at the entity level. The S corp tax rate is the tax rate for the owners.
Keep in mind, not every corporation can be an S corporation. Certain qualifications must exist to obtain S corporation status, including:
- Being a domestic corporation
- Having only allowable shareholders
- These may be individuals, certain trusts and estates but may not be partnerships, corporations or non-resident alien shareholders
- Having 100 shareholders or less
- Having only one class of stock
- Certain corporations are ineligible like certain financial institutions, insurance companies and domestic international sales corporations.
What about Accumulated Earnings Taxes?
If you’re a corporation that doesn’t distribute or pay dividends to your shareholders, you must pay an accumulated earnings tax of 20%. The IRS imposed this tax to prevent corporations from stockpiling earnings instead of distributing them to shareholders to avoid dividend taxes.
The good news is the IRS treats anything under $250,000 the cost of doing business for more corporations and $150,000 for service corporations like accounting, actuarial science, architecture, consulting, engineering, health, law and the performing arts.
Calculating Your Federal Corporate Tax Rate
The federal corporate tax rate, as set by the TCJA, is 21% of annual profits. For example, if your business’ annual revenue was $500,000 with operating expenses of $150,000 your profit (and taxable income) is $350,000 ($500,000 – $150,000 = $350,000).
Figuring out how much you owe in taxes to the federal government is simply finding 21% of $350,000 (350,000 x .21 = 73,500). You would owe $73,500 in federal taxes. State corporate taxes are another matter altogether. These are just calculations for the corporate taxes, not the taxes your shareholders must pay on their dividends.
Figuring Your State Corporation Tax Rate
While the federal corporate tax is a flat rate, state rates are not. State corporate tax rates vary from state-to-state with low rates of 0% in states like Nevada, South Dakota and Wyoming to highs of 9% in Alaska, New Jersey and Washington D.C. and even 12% in Iowa. You combine the federal tax rate of 21% with your state’s corporate tax table to figure your combined state and federal corporate tax rate.
(Insert Chart Here – possible source: https://taxfoundation.org/us-corporate-income-tax-more-competitive/)
Decrease Your Corporate Income Tax Liability
Aside from obtaining an S corporation status, if your company has the qualifications to do so, there are other ways to decrease your corporate income tax liability. According to the Balance Small Business, these include to:
- Fund a retirement plan. Tax savings exist for IRS qualified plans.
- Use tax credits to lower your business income. These credits include going green, hiring employees and the family leave tax credit.
- Buy new equipment. You can write off new equipment and vehicles.
- Write off bad debt. List the customers who haven’t paid and deduct these amounts from your income.
How Benefiting Your Employees Can Reduce Your Tax Bill
One of the best ways to reduce your tax bill is to deduct the wages and benefits you give your employees.
How to deduct wages.
It literally pays to pay employees well. According to SHRM, wages and benefits paid to employees are deductible from the corporation’s gross income, so long as the amounts are reasonable, ordinary and necessary. If your corporation is in the 39% federal tax bracket and the 7% state tax bracket, 46 cents of each additional dollar in wages and benefits are effectively paid by federal and state governments in the form of reduced tax liabilities.
How to deduct benefits.
Along with wages, you can also deduct gifts given to employees, like bonuses. Many other benefits are included as well, including:
- Employee discounts on goods and services.
- Working condition benefits like a company car.
- Using office supplies for personal purposes.
- Transportation benefits like parking, transit passes or cash reimbursements for those expenses.
- Mobile phones given to employees for business use.
- Not only are these benefits deductible, but they also create a great working environment and culture for your employees.
Take Advantage of Compensation and Benefits Management
Offering employee compensation and benefits does more than lower your corporate tax rate, they help retain your current employees and make job offers stand out, boosting your recruitment efforts. There are several options for incorporating compensation including offering cash, profit sharing, retention bonuses and non-cash incentives like PTO, food, tickets and so on.
BirdDogHR’s Compensation Management software takes the guesswork out of rewarding high-performing employees by managing salary increases, bonuses and comparing market data with one easy-to-use system. Plus, you can access it from anywhere, filtering data based on departments to make sure your company is attracting top talent by offering competitive salaries.