Corporate taxes: A basic overview
This post summarizes some basic information about taxes for a C-Corporation in the United States. For those of you who are just starting up a corporation and getting into this, it may be a helpful read. Even if you outsource the work, it may still be useful to hear an overview of what is happening behind the scenes. I’ll outline some basic concepts, the general gist of the process, and a few links to important forms and services.
The usual disclaimer when I write-up info like this: I’m not a tax lawyer, this shouldn’t be your official guide to doing taxes. This is just research and summary of instructions and documents available online, hoping to provide some introductory info for topics you may care about!
Corporations pay taxes to states and to the federal government. For example, if a company is incorporated in Delaware and operates in California, taxes will by paid the company to three recipients:
- Delaware State: An annual franchise tax for being incorporated in that state.
- California State: Regular payroll taxes and an annual franchise or income tax for doing business in that state.
- United States: Regular employment (payroll) taxes and an annual income tax.
There may be other sorts of taxes and recipients associated with the corporation and operations. For example, a company might pay a local tax depending on the location they operate and size of their business (e.g. to San Francisco). But I’ll focus on state/federal payroll and corporate income taxes for the rest of this post.
Payroll and corporate income taxes are paid at different frequencies:
(1) Payroll taxes are deposited whenever a company pays wages to an employee. When paying wages, the company must calculate and pay the appropriate taxes to the state and federal government. They also file quarterly reports summarizing the wages and taxes paid. There are a few different payroll taxes, each with its own definition and calculation (generally a function of the wage amount).
(2) Corporate income tax is paid annually. In practice, however, a company may actually be required to pay “estimated taxes” ahead of time, quarterly throughout the year. But the final accounting is done annually. Corporate income tax is a tax levied on any profit the company makes after subtracting out applicable business-related costs (those costs are known as “deductions”).
When a corporation deposits tax payments, some of this is money that comes directly from its balance sheet (e.g. California UI tax) and some of this is money paid on behalf of its employees (e.g. Personal income tax). The difference is that the former are considered expenses to the corporation, while the latter are considered expenses coming out of (or, “withheld” from) the gross salary earned by the employee.
Whenever a corporation pays wages to an employee, they start with a “gross” amount and then figure two sets of taxes:
- Employee withholding: They “withhold” some of the wages based on the payroll taxes that are due by the employee. For example, if the corporation is paying a $5,000 wage to its employee and the state charges 10% personal income tax to employees, the net sum the employee will receive drops by 10% to $4,500. That 10% (in this case, $500) is deposited by the corporation to the state.
- Employer expenses: The corporation will also directly pay any employer-responsible taxes to the receiving party (state/federal). For example, if the corporation is paying a $5,000 wage to its employee and the state charges a 1% “unemployment insurance tax” to employers, the corporation will pay $50 to the state in addition to wages paid to the employee.
So, in this example, the corporation sends a few checks at payroll time: a net payment (gross pay minus any withholding) is sent to the employee, the withheld amounts are sent to any state and federal recipients, and the employer-responsible taxes are sent to any state and federal recipients. In general, the deposits to the state and federal recipients must be made within specific timeframes after the salary is paid.
Corporate income taxes
At the end of the year, the corporation pays income taxes based on the profit it has earned. The tax required to be paid is figured in a multi-step process:
- Start with the revenue the corporation has made that year
- Subtract out applicable business costs from the year (“deductions”)
- Apply the relevant tax percentage on the remainder
Deductions include expenses like wages and costs of doing business. There are rules associated with which costs may be deducted — for example, charitable donations by the corporation may only be considered a deductible cost depending on their size relative to the company’s income.
Net Operating Loss: Depending on the amount of costs the company has incurred, they may not end up with any positive taxable income at all — in which case they won’t pay corporate income tax, and they may even be able to “carry” that loss over to a past or future year. Note that zero corporate income tax doesn’t necessarily mean that the business as a whole is not paying any taxes to the government. For example, if the company pays out its entire revenue in reasonable wages (and any other deductible expenses) throughout the year, a percentage of that would have been sent to the government in the form of personal income taxes.
Examples of forms and services
Here are a few examples of the services used in managing this process:
- State payroll taxes are deposited to California via the EDD system: https://edd.ca.gov/About_EDD/Employer_Services_Online.htm.
- Federal payroll taxes are deposited to the government via EFTPS: https://www.eftps.gov/eftps/
- State and federal income taxes are handled annually via two filings: (a) California Form 100: Booklet, (b) Federal Form 1120: Info.
This list isn’t comprehensive by any means. There are more forms required, such as quarterly reporting of wages (Form 941), annual FUTA tax (Form 940), and any additional forms required by parts of the filings along the way.