Paying Corporate Taxes
Corporations come in two varieties, S corporations and C corporations; as you may expect, each has unique tax requirements and practices. In fact, not all corporations even file tax returns. Some smaller corporations are designated as S corporations and pass their earnings on to their stockholders.
Check with your accountant to determine whether incorporating your business makes sense for you. Tax savings isn’t the only issue you have to think about; operating a corporation also increases administrative, legal, and accounting costs. Be sure that you understand all the costs before incorporating.
Reporting for an S corporation
An S corporation must have fewer than 100 stockholders. It functions like a partnership but gives owners more legal protection from lawsuits than traditional partnerships do. Essentially, an S corporation is treated as a partnership for tax purposes, but its tax forms are a bit more complicated than a partnership’s: All income and losses are passed on to the owners of the S corporation and reported on each owner’s tax return, and owners also report their income and expenses on Schedule E.
Reporting for a C corporation
The type of corporation that’s considered a separate legal entity for tax purposes is the C corporation. A C corporation is a legal entity that has been formed specifically for the purpose of running a business.
The biggest disadvantage of structuring your company as a C corporation is that your profits are taxed twice — as a corporate entity and again on dividends paid to stockholders. If you’re the owner of a C corporation, you can be taxed twice, but you can also pay yourself a salary and therefore reduce the earnings of the corporation. Corporate taxation is very complicated, with lots of forms to be filled out, so there’s not enough room here to go into great detail here about how to file corporate taxes. However, the table shows you the tax rates C corporations are subject to.
|Taxable Income||C Corporation Tax Rate|
You may think that C corporation tax rates look a lot higher than personal tax rates, but in reality, many corporations don‘t pay any tax at all — or pay taxes at much lower rates than you do. As a corporation, you have plenty of deductions and tax loopholes to use to reduce your tax bites. So even though you, the business owner, may be taxed twice on the small part of your income that’s paid in dividends, you’re more likely to pay less taxes overall.