Businesses pay income taxes to the government, just like individuals do. However, businesses and corporations have special rules that they have to follow when it comes to paying taxes. Many of these rules are categorized under corporate tax laws and statutes.
The types of taxes that businesses are required to pay include taxes intended for specific areas. For example, corporations may be subject to:
- Real Estate Taxes: If your business owns real estate, like a building, then the local taxing authority will require that the business pay property taxes;
- Payroll Taxes: Payroll taxes or employment taxes are usually calculated as a percentage of an employee’s salary. Payroll taxes include social security and medicare taxes, federal income tax withholding, and federal unemployment taxes. While some taxes are collected from employees, others (like unemployment tax) are not, and must be paid in full by the employer;
- Franchise Tax: Some states have taxes that are based on the value of the company;
- Excise Tax: Excise taxes are taxes on specific goods, such as alcohol, gasoline, cigarettes, some luxury items, and other goods that are regulated by tax laws; and
- Income Tax: Income taxes are based on the income of the company.
The way your business is taxed and the amount of income tax that your business must pay depends on the type of business structure you have in place. Corporations are taxed differently than other business structures. These tax structures are as follows:
- S Corporations: S corporations are essentially pass-through entities. The corporation itself does not pay federal income tax, but shareholders are taxed on their allocated share of the income. This allows business owners operating the business to avoid the “double-taxation” problem of paying taxes on business income and then on personal income.
- C Corporations: Unlike S corporations, C corporations pay income tax at the corporate level. If the corporation distributes dividends to shareholders, those dividends are also taxed as income (both at the corporate level and again at the shareholder level.) Because these dividends are essentially taxed twice, “double-taxation” does become an issue for C corporations.
In previous years, C corporations were taxed according to a graduated scale that depended on the corporation’s annual taxable income. However, recent changes to the tax laws have reduced the federal tax rate on corporate income from a high of 35% to a flat rate of 21%.
Depending on elections made by the members of the LLC (as well as the number of members of the LLC), the IRS may treat the company either as a corporation, a partnership, or as a pass-through entity.
Multi-owner LLCs are generally treated as partnerships for tax purposes. While the partnership itself does not pay taxes, the members of the partnership (or the LLC) are taxed according to their share of the income from the company. Even if the money stays in the company bank account to cover future expenses, and is not actually distributed to the members, the members still must pay taxes on that income. While partners and members are taxed separately, the company must also file an individual tax form with the IRS.
Single-member LLCs are considered pass-through entities by the IRS, meaning the business itself is not taxed separately from the individual, and business profits are taxed on the owner’s individual tax returns. The owner of the LLC must report all profits or losses and submit it with their personal tax return.
Some states may also require owners who are actively involved in the day-to-day operations of the business to pay self-employment taxes. Legitimate business expenses can be deducted from the company profits for tax purposes.
Sole proprietorships are also considered pass-through entities. Business profits for sole proprietorships are considered to pass through the business to be taxed on the owner’s personal tax returns. Legitimate business expenses, such as expenses for supplies or services, can be deducted from the business’s profits. Depending on the state, the business owner may also have to pay self-employment taxes if they also conduct the day-to-day operations of the company.
Corporate tax laws can be very complicated and confusing, and there have been recent changes to tax laws in the past few years that can affect your company’s tax situation. Not only that, but each state has its own rules regarding business taxes that depend on the type of business you run. A local business attorney can help you figure out how the law affects your corporate taxes, and give you advice on how to handle taxes going forward. You may also find it helpful to enlist the help of a CPA at tax time.
If you ever have issues when it comes to your business taxes, you may need the experience of a qualified attorney when dealing with the IRS. Your attorney can help guide you through the process of dealing with government entities in order to get the best possible outcome for you and your business.