These days, everyone wants to become a part of the business world and run their own companies. Do you think corporate life is that straightforward? Although everyone enjoys being their boss, running a business is no fun and games. From overseeing operations, managing finances to handling legal taxation requirements – entrepreneurs have a lot on their plates. Once you start struggling with the overflowing paperwork, many questions will hit your mind.
Why do we pay taxes? Is it necessary to deduct them from profits? Undoubtedly, taxes are fraught with confusion and frustration because no business likes scaling down its earnings. The whole point of taxes is to get money from the rich and distribute it equally. Similarly, taxes also fund public expenditure – transport, streetlights, national defense, etc. Now, since you understand the concept behind paying taxes, familiarize yourself with taxation laws in the corporate world.
From standard tax rate, sales tax, reporting dates, to return filing protocols – learn about different tax and reporting requirements. If you are new to this corporate world, let us help you out. Here is all you need to know about laws and taxation in the corporate sector.
Table of Contents
1. Federal Corporate Income Tax
With limited liability, private, and public companies, the corporate world is diverse. Before delving into taxation, learn about the two types of corporations for federal income tax – C corporation and S corporation. A C-corporation is a separately taxable entity, meaning they have to pay tax on income earned. Alongside this, they have to pay tax on any profit distributed amongst the shareholders in dividends.
In contrast, an S corporation does not have to cough up money on income taxes. All income and expenses are the discretion of the shareholders, who then have to report taxes independently. If you wish to develop a comprehensive understanding, opt for online LLM tax to administer taxes efficiently. Besides corporation formalities, you will learn about bylaws, filing annual reports, and legal obligations. Both these corporations have their share of risks and advantages. Thus, assess your business situation, define goals, and then decide whether you want to become a separate entity or not.
Are you familiar with the income tax rate? Usually, countries follow a progressive taxation approach – as income increases, the tax amount also expands. The United States imposes a 21% tax on company profits. These are equal to a corporation’s receipts, less allowable deductions – the cost of goods sold, interest, depreciation, and other expenses. Once you calculate the operating profit after interest, you have to charge a 21% tax. After deducting the tax, you will get your ‘annual’ net profit for the year.
Tax Withholding
Every corporation has to withhold federal income tax from its employees’ wages. The Federal Insurance Contributions Act (FICA) – the social security act requires employers to pay for retirement and healthcare. Thus, this portion of income withholds with the corporation from every payment of taxable wages. Moreover, corporations have to ensure that every employee is filing returns and depositing the withheld income tax.
2. Sales Tax
Whether it is a giant corporation or a consumer – everyone has to pay taxes. Like businesses pay federal corporate income tax, customers have to pay sales tax. However, instead of directly paying this tax to the government, sales tax is chargeable on products and services. And since corporations sell products and services, they are responsible for collecting this tax from customers. Therefore, you have to set up a flexible tax collection system to report and pay that tax to your state.
Every state has a varying sales tax rate, which stands at 7.12%. Depending on state law, some products and services are non-taxable, which they have zero tax rates. Similarly, some products and services have a high tax to limit their consumption. Usually, these are demerit goods – cigarettes, alcoholic beverages, etc. For sales tax collection, you have to obtain a license or permit from the state.
3. Tax Deductibles
Usually, a 21% tax rate on profits seems reasonable until you see a huge chunk of profit going away. As a result, entrepreneurs and directors try to minimize their profits by using tax deductibles. These are expense deductions that lower your tax bill and increases the tax return. However, to save money, don’t adopt illegal methods since every company is subject to an audit. Here are a few tax deductibles that you shouldn’t miss.
- Depreciation: As per the International Accounting Standards (IFRS), every company must charge depreciation expense over an asset’s life. It is a non-cash expense that reduces your tax payable amount.
- Business Insurance: Deduct business insurance from total expenses to reduce profits and incomes.
- Charitable contributions: If you are making any donations to an organization, deduct it from expenses. You can also claim these donations against your corporate tax return.
Nevertheless, don’t go over the board with these tax deductions. Low profits lead to low dividends for the shareholders that can upset the investors, reflecting inadequate performance. In addition to tax deductibles, use tax credits to cut corners on tax expense.
Final Thoughts,
Indeed, laws and taxation are a bit tricky, especially in the corporate world. Some corporations are subject to double taxations since they have to pay corporate and income tax. Understanding the different types of taxes and regulations can help in streamlining tax filings. Similarly, get the hang of reporting dates to close doors for late filing penalties. Once you get your legal obligation straight, you can adequately focus on your company’s vision and goals.