Your company’s tax liability largely depends on the business structure you choose. And if you structure your business as a corporation, you are responsible for paying the corporate tax rate on company earnings. So, what’s the corporate tax rate?
How corporation taxes work
A corporation, or C Corp, is a type of business structure where owners enjoy limited liability protection. Corporations are considered separate legal entities, meaning they are separate from their owners. Owners are not responsible for their corporations’ actions and debts.
But because corporations are separate legal entities, they are subject to double taxation. This means that the company itself pays taxes on its earnings and the owner also pays taxes. In other business structures (e.g., sole proprietorships), taxes pass through to the owner so they only pay taxes on earnings once.
If you own a corporation, you must report its profits and losses on Form 1120, U.S. Corporation Income Tax Return. And, report your personal income on your individual tax return.
Corporations are generally taxed at both the federal and state level. When a corporation pays taxes on its taxable income, it must pay at a rate set by both the federal and state levels.
If you structure as a corporation, you must know the corporation tax rates.
What’s the corporate tax rate?
Again, there are both federal and state corporation tax rates. The federal corporate tax rate is a flat rate that applies to all businesses. On the other hand, state tax rates vary by state.
Federal corporate tax rate
Currently, the federal corporate tax rate is set at 21%. Prior to the Tax Cuts and Jobs Act of 2017, the tax rate was 35%.
The corporate tax rate applies to your business’s taxable income, which is your revenue minus expenses.
Let’s say you have annual revenues of $250,000 and expenses of $55,000.You want to figure out how much you owe in federal taxes.
First, subtract your expenses from annual revenues:
$250,000 – $55,000 = Taxable Income
$195,000 = Taxable Income
Next, multiply the federal corporate tax rate of 21% by your taxable income:
$195,000 X 0.21 = $40,950
You would owe $40,950 in federal corporate taxes.
State corporation tax rates
Most states set a corporate tax rate in addition to the federal rate. But, not all states levy a corporation tax rate.
South Dakota and Wyoming do not have state corporate income taxes. Nevada, Ohio, Texas, and Washington levy gross receipts taxes instead of corporate taxes.
State corporate income tax rates range from 1% – 12%. The states with tax rate ranges apply tax rates based on how much the corporation earns.
Use the chart below to find C Corp tax rates by state.
|State||State Corporate Tax Rate|
|Alaska||0 – 9.4%|
|Arkansas||1% – 6.5%|
|Hawaii||4.4% – 6.4%|
|Iowa||6% – 12%|
|Kansas||4% – 7%|
|Louisiana||4% – 8%|
|Maine||3.5% – 8.93%|
|Mississippi||0% – 5%|
|Nebraska||5.58% – 7.81%|
|New Jersey||6.5% – 9%|
|New Mexico||4.8% – 5.9%|
|North Dakota||1.41% – 3.41%|
|Oregon||6.6% – 7.6%|
|Vermont||6% – 8.5%|
Contact your state for more information on corporate income taxes.
How to decrease your corporate income tax liability
You can reduce your corporate tax liability by deducting qualifying business expenses from your taxable earnings.
You can deduct things like:
- Bad debt
- Charitable donations
- Miles driven for business purposes
Another way you can decrease your tax liability is by choosing a business structure that does not impose double taxation. For example, structuring as an S corporation is an alternative to structuring as a C Corp.
Whichever way you decide to structure your business, be sure to have a reliable accounting system. Patriot’s online accounting software streamlines the way you manage your books. Start your self-guided demo today!
This is not intended as legal advice; for more information, please click here.