A corporation is a business entity that has legal privileges and liabilities independent of its owners. Unlike limited liability companies, sole proprietorships and partnerships, the profits of a corporation are taxed directly through the filing of a corporate tax return. The profits of the other business entities, on the other hand, are allowed to pass through to the owners who then claim them on their personal returns. A corporation is the only business structure that is set up as a separate entity, distinct from its owners, for tax purposes.
The specifics of corporation tax:
- A corporation must file a corporate tax return with IRS Form1120.
- A corporation pays taxes at the corporate tax rate which varies from about 15% to 35% depending on the income of the business.
- The taxable profits of a business generally include retained earnings together with dividends that are distributed to the shareholders.
- To reduce profits, a corporation is allowed to deduct business expenses which include start-up costs, operating expenses, salaries and bonuses and costs related to medical and retirement plans for its employees, among other things.
- If shareholders work for the corporation, they must pay personal income taxes on any salaries or bonuses earned.
- If shareholders receive dividends from the corporation, they must pay personal income taxes on these amounts. Since dividends are not considered to be a tax-deductible expense for the corporation, the corporate entity is also taxed on any dividends paid.
In addition to the specific tax requirements outlined above, a corporation must pay employment taxes for all of its employees whether they are shareholders or non-shareholders. These employment taxes include federal and state withholding taxes, Medicare and Social Security taxes, unemployment taxes and workers’ compensation taxes. A corporation must also pay sales taxes and excise taxes on its products or services wherever applicable.