All small businesses in the United States have to pay federal corporate income tax on their annual income. The tax rate generally depends on the structure of the entities and the money they make per year.
Almost 95% of businesses including sole proprietorships, partnerships, S corporations, and limited liability companies have pass-through Taxation.
Pass-through Taxation entities don’t have to pay taxes twice nor do they have to pay them directly on the corporation level. Rather the income, credits, losses, and deductions are passed to the owners of the corporation who further pay personal income tax on profits.
On the other hand, a C corporation comes under double Taxation and hence is taxed twice unlike pass-through taxation. Here, Corporations pay corporate income Tax out of the profit generated as well as shareholders pay personal income tax from the dividends they earn.
The owners of small businesses pay a tax rate of 19.8% on average. As per the reports of the small business administration (SBA), the average tax rate of sole proprietorships, small partnerships, and S corporations are 13.3%, 23.6%, and 26.9% respectively.
C corporation double taxation
. Direct corporation Tax on revenue
C Corporation is a separate entity from its owners, it pays direct business taxes on revenue at the flat rate of 21% after deductions and credits. Earlier the tax rate was 35% which is reduced through the tax cuts and the jobs act of 2017. The same tax rate is applied to the LLCs that are elected to be taxed as same as corporations.
. Shareholders’ income tax on dividends
In a C corporation, Shareholders pay Business taxes on the dividends which they earned by holding stocks in the company. These dividends are divided into two categories; unqualified and qualified dividends.
Unqualified and qualified dividends
All those shareholders who owned the stock for not more than 60 days are subject to unqualified dividends and entitled to pay taxes at the personal tax rate whereas those who owned it for more than 60 days are subject to qualified dividends and are entitled to pay taxes on a sliding scale fixed by Internal revenue system.
. Qualified dividend tax rate
The rate of the qualified dividends is equivalent to the capital gain tax which is lower than individual income tax. The three types of dividend tax rate 0%, 15%, and 20% that is levied based on filing status.
The unqualified dividend tax rate
The unqualified dividend is taxed at the same rate as the standard federal income tax rate. the different standard federal income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% that is levied based on filing status.
Pass through taxation
In pass-through taxation, the tax rate is determined based on the federal income tax bracket and filing status. There is no hard and fast rule to determine how much small businesses can make before payment of taxes. Taxable income is affected by various factors such as the filing status, deductions, and potential itemization, etc. so, it’s better to hire a tax professional who considers all these factors carefully while calculating taxable income.