How are Corporations Taxed ? A Brief Primer

Paying taxes is a must for any corporation. Non-payment of taxes could lead to penalties and a lot of other problems for a corporation. This can even cause corporations to get penalized for the underpayment of taxes.

The tax web is a vexing and taxing issue for any business owner. There are all kinds of taxes to pay: federal, state, and local. Then there other types of taxes that should be paid: corporate income tax, employment tax, sales tax, excise tax, franchise tax, and a host of other taxes. Besides all those, there are forms to fill and file with several deadlines to keep. 

Then there are the estimated taxes that need to be paid quarterly. If you underpay, you could end up in trouble. If you overpay, it comes back as a tax return. And if you fail to pay, you are penalized.

Whichever way you look at it, paying corporate taxes is a must, but it’s a difficult and complicated issue. You need to have professionals to help you with the calculation and filing of corporate taxes.

 

Let us delve into some of the intricacies of taxes that a corporation needs to pay.

 

Tax Due Dates

Most businesses feel that they just need to pay taxes by April 15. However, some corporations need to pay taxes every quarter. 

Any corporation that feels it will owe $1000 in federal income taxes in a financial year needs to pay estimated quarterly taxes by the 15th of June, September, January, and April. Failure to do so could only lead to underpayment fees. You may have to pay underpayment fees even if your actual income is much more than the estimated income. However, if you overpay, it will be returned as a tax refund. To file these taxes you need to use IRS Form 1120.

As the name suggests, estimated tax is just an estimate. You will not be penalized for underpayment unless the difference between the estimate and the actual amount is very big.

Also, the ‘quarters’ are not really quarters of the year. At least two of the ‘quarters’ are just two-month durations. Two ‘quarters’ are three-month quarters, one is a two-month-‘quarter’, and the last is four months. 

You also want to keep in mind that if the tax filing date is on a holiday or a Sunday, you can file on the next working day.

 

Some Mandatory Taxes

It is not possible to cover all the taxes a corporation needs to pay. The ones we mentioned so far are just some of the main ones. Each state has a different set of tax rules, so you will have to check locally to get information on those and the forms required. 

Generally, these are the main tax heads you need to look out for:

1. Corporate Income Tax

Corporate income tax has to be paid at the federal and state levels.

The federal corporate income tax now stands at around 21%. However, many corporations try to work around this and pay much less or even nothing! The IRS website has more information on the corporate income tax that you need to pay.

Corporate taxes are calculated on net income which is the result of your income minus the expenditures. In this case, many corporations claim almost anything as expenditures to save on taxes. Some corporations even claim employee wages, employee benefits, and business expenses as deductions. Some corporations show that they have reinvested all their taxable income in the business itself to try to avoid paying any taxes!

Instead of trying to dupe the government of taxes, you need to ask for professional help with your taxes.

State income tax varies from state to state. For example, in North Carolina, it is 2.5% while it’s at 12% in Iowa. Wyoming and South Dakota do not levy this tax. So, you will have to check in each state where you run your business for details about their tax laws and tax percentage.

Also, keep in mind that if you have businesses running in multiple states, you will have to pay the local taxes for each state separately.

2. Employment Taxes

Any corporation with employees needs to pay employment taxes. These taxes vary from state to state, so you will have to check locally to see what applies to your corporation. But some of the federal employment taxes could be:

  • Federal income tax withholding from employees salaries
  • Federal Insurance Contributions Act (FICA) taxes for Medicare and Social Security. Here, both the employer and employee pay equal amounts.
  • Federal Unemployment Tax Act (FUTA) taxes are paid by the employer.

The first two federal taxes are calculated on each employees’ gross pay. The employer has to match the FICA deduction for each employee. These amounts are deducted from the employees’ paychecks. Meanwhile, the FUTA is paid only by the employer.

Every quarter, federal and FICA details must be filed on IRS Form 941. Also, you need to file FUTA details on IRS For 940 annually.

3. Sales Tax on Products and Services

These taxes are state taxes, so you will have to check with each state where you have your business interests regarding the percentage and rules. Some states require you to display a seller’s permit in your establishment.

You need to collect the sales tax from your customers and deposit these taxes regularly. This tax also applies to online sales and services.

4. Property Tax

If your corporation has properties, you also need to pay property tax. This is a local tax that you need to pay to the local authority where your property, like a building is located. The tax will be based on how the property is valued.

There are two types of property that could be taxed: real property and personal property. Personal property can further be classified as tangible property or intangible property. Meanwhile, real property includes buildings and structures on the land. This is taxed in all states. 

Tangible property is any physical object other than property or money. Some examples are furniture, art, and jewelry. On the other hand, intangibles consist of personal property like bonds, bank accounts, stocks, and insurance policies. Tangible and intangible propertyies are not taxed in many states. Only real property is liable for taxes.

5. Excise Taxes

Another federal tax is the excise tax on certain types of use and consumption, like consumption of fuel or use of transportation and communication. These taxes are paid to the IRS using Form 720.

6. Franchise Tax

Some states levy a franchise tax for permission to a business or corporation to operate in their state. The tax may go under different names in different states – registration fee, license tax, or excise tax – but the purpose is the same. Failure to pay this tax could cause the corporation the right to operate in the state.

7. Annual Corporate Report

Some states insist on corporations filing an annual corporate report. In some states, this report has to be filed every two years. The state administration uses the corporate report to check on the finances and performance of the corporation. It could also be used to decide the amount of franchise tax a corporation needs to pay.

Corporations that fail to file the annual report could face dissolution or have their certificate of authority revoked by the state. 

 

Tax-saving Incentives and Options

To save on taxes, you could look for tax incentives and tax holidays in certain circumstances. For example, there are tax exemptions in cases of natural disasters. There are also tax incentives for using energy-saving equipment. You will need to explore this avenue and get details to see how you can save taxes for, say, using energy-saving equipment or even making charitable donations.

 

Failing to File Taxes

Failure to pay taxes on time attracts penalties. Corporations need to be aware that they will be charged 5% of any unpaid taxes per month for non-payment of taxes. This goes on for non-payment for up to 5 months. If taxes remain unpaid even after 5 months, the corporation will be charged one-half of a percent extra for each unpaid month. 

You are also charged interest on the unpaid amounts till all dues are paid off. Either way, late payment by 60 days includes a penalty of $100 as well.

A corporation could file for an extension by filing Form 7004 by mail or electronically. However, this extension is only given for six months.

A suggestion is to pay your taxes in time. Get a good accountant and tax consultant to help you file your taxes so that you do not attract any penalties or fines.

 

Conclusion

For the smooth functioning of a corporation, paying taxes is necessary. There are many types of taxes that a corporation needs to pay. Some of these taxes are federal taxes, but there are state and local taxes as well. Non-payment of taxes could result in penalties and problems for a corporation. 

Your best option is to hire competent professionals to help you keep track of your income and expenses so that you can file your taxes in time. Make sure you study the options where you can claim tax deductions or tax exemptions but do not default on paying your taxes.

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