1. What Is Income Tax for a Company?
Corporate income tax is the tax a business pays on its net income (revenue minus expenses). This applies to C corporations, and some LLCs or partnerships that elect to be taxed as corporations.
2. Types of Business Structures & Taxation
- Sole Proprietorships / Single-Member LLCs: Income is taxed on the owner’s personal return (no separate business tax).
- Partnerships / Multi-Member LLCs: Pass-through entities; income flows to partners’ personal tax returns.
- S Corporations: Also pass-through, but must file a separate return (Form 1120S); profits go to owners/shareholders.
- C Corporations: Pay corporate income tax separately (Form 1120). This is where corporate income tax kicks in.
3. How Companies Pay Income Tax (C Corps)
Here’s the process step-by-step:
1. Calculate Net Income
Revenue – deductible business expenses = taxable income
2. Apply the Tax Rate
The federal corporate tax rate (as of now) is 21%. Example:
If net income = $100,000 → Tax = $21,000
State taxes may also apply, depending on where the company operates.
3. File a Tax Return
- Form 1120 is used by C corporations.
- Due by April 15 (for calendar year businesses), or the 15th day of the 4th month after the fiscal year ends.
4. Pay Estimated Taxes Quarterly
If a company expects to owe more than $500 in tax, it must pay estimated taxes quarterly:
- Due: April 15, June 15, Sept 15, Jan 15
- Paid via IRS EFTPS system
5. Distribute Dividends (Optional)
If profits are paid to shareholders as dividends, those individuals pay personal income tax on them. This is where double taxation comes in (once at corporate level, once at shareholder level).
4. What About S Corps or LLCs?
- The business itself doesn’t pay income tax.
- Instead, profits “pass through” to owners/shareholders, and they pay income tax on their personal return (usually via Schedule K-1).