Corporate Tax Rates and What You Owe
Learn About Income Taxes for Corporations and S Corporations
2018 Changes to the Corporate Tax Rate
The Tax Cuts and Jobs Act of 2017 changed the top corporate tax rate from 35% to one rate of 21%. This rate will be effective for corporations whose tax year begins after January 1, 2018, and it is a permanent change.
U.S. Corporation Tax Rate through 2017
It is common to say that the U.S. corporate tax rate is 35%, but the rate varies from 15% to 35%, depending on the amount of corporate income subject to tax for the year.
If you want to calculate the corporate tax for your business, you will first need to know your taxable income. To estimate your taxable income, you have two options: (a) complete (or have your tax preparer complete) Form 1120. or (b) take last year's taxable income as a starting point.
Corporate Tax Rate Schedule (2005 through 2017)
If taxable income (line 30, Form 1120) on page 1 is:
|Over||But not over||Tax is||Of amount over|
|50,000||75,000||$7,500 + 25%||50,000|
|75,000||100,000||13,750 + 34%||75,000|
|100,000||335,000||22,250 + 39%||100,000|
|335,000||10,000,000||113,900 + 34%||335,000|
|10,000,000||15,000,000||3,400,000 + 35%||10,000,000|
|15,000,000||18,333,333||5,150,000 + 38%||15,000,000|
Corporations file a tax return each year and pay quarterly estimated taxes.
How to Calculate Corporate Tax Owed
Of course, there is software available for calculating the corporate tax amount, but if you want to try it yourself here's how the calculation works:
Let's say your corporation has earnings for the year of $300,000.
- Look on the table above for the line that includes your taxable income. The fourth line is $100,000 to $335,000, so that's the line you use.
- The tax is $22,500 plus 39% of the amount over $100,000.
- So, 39% of 200,000 is $78,000.
- The total tax is $22,500 plus $78,000, equals $100,500.
The effective tax rate for your corporation is 33.5%. This is slightly less than the 39% in the schedule.
Corporations and the Double Tax Dilemma
The profit of a corporation is taxed to the corporation when it is earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax. In the example above, the corporation itself pays $100,500 in tax on $300,000 in earnings. If the corporation distributes all or part of that income to shareholders as dividends, the individual shareholders must report this income on their individual tax returns. By the way, dividends are taxed at a special dividend tax rate. (If the corporation pays an owner back for an investment in the company, this is considered a return of capital investment, and it's not considered a dividend and is not taxable.)
As you can see, the earnings are taxed to the corporation and the individual shareholders.
For this reason, some corporations attempt to avoid the shareholder dividend tax by not distributing dividends. But the IRS can impose an additional tax called the accumulated earnings tax.
Accumulated Earnings Tax
In addition to the regular corporate taxes, corporations must pay an additional accumulated earnings tax of 20% if the corporation doesn't distribute or pay dividends.
The IRS Tax Code says this tax is for corporations:
formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.
This tax doesn't apply to personal holding companies, non-profits, or passive foreign investment companies.
This tax is imposed by the IRS to prevent corporations from piling up earnings and not distributing them to shareholders in the form of dividends, thus avoiding the tax on the dividends.
S Corporations - Not Taxed as Corporations
S corporations are taxed in a different way from corporations. The shareholders of an S corporation are taxed on their percentage share of the taxable income, passed through to them on their personal tax returns.