Tax Differences

Excluding sole proprietors, who make up the majority of business tax returns, more than 80 percent of all companies in 2015 were organized as throughput or throughput companies. As an individual, getting notification that you’re eligible for a tax return can feel like you’ve been given an online casino bonus.

Corporation tax is paid on a company’s taxable income which includes income, costs of the goods sold, gears, general and administrative (G & A) costs (e.g. Sales, marketing, research and development), depreciation and other operating expenses. In the case of C corporations, also known as regular joint stock companies, income is subject to so-called double taxation: income is distributed in the form of dividends to the owners and these dividends are subject to taxation.

Companies can also deduct salaries, health benefits, tuition fees, and bonuses. The corporate tax rate in the United States is 21%, owing to the Tax Cuts and Jobs Act (TCJA), signed into law in 2017 by President Donald Trump and took effect in 2018. So, corporations do not pay corporation tax on income passed on to entrepreneurs who are taxed on their individual tax returns. While this may look like a relief to the employers, there are some compulsory taxes they need to pay, like the FUTA (Federal Unemployment Tax Act). But the question arises – so what is FUTA? Well, these are funds collected by the IRS from the employers. This fund is used essentially to provide aid to individuals who have lost their job.

Because corporations must pay these taxes, the tax burden is not only increased on the company, but also on its consumers and workers through higher prices and lower wages. In 2003, Congress made a step towards leveling the playing field by introducing a special dividend income tax rate (15% dividend income tax) instead of the much higher normal income tax rate (38.6%). Despite their negative economic impact, more and more countries, including the US, have moved over time to tax companies at rates of up to 30%.

The federal corporate tax is different from the individual income tax in two ways. Firstly, corporation tax applies only to companies that are corporations, not to partnerships or sole proprietorships. Second, it taxes not only gross income, but also net income and profits, with most of the costs of doing business deductible.

The separation of the taxation of companies’ income from that of their shareholders follows the legal principle that companies and shareholders are different entities. Most economists acknowledge that taxing corporations prevents shareholders from escaping the current taxation of undistributed profits when their shares increase in value and convert those gains into capital gains, which in many countries are taxed less than ordinary income, effectively exempting income from tax. Other academics claim that companies acting on behalf of shareholders are taxed like large partnerships unless their profits reach individual income tax.

Although there are some similarities between personal and corporate taxation, such as income declarations, charitable deductions and pay-as-you-go provisions, there are also significant differences. Filing taxes is a prerequisite, regardless of whether you are an individual or an entrepreneur.

If an individual taxpayer who works for an employer files his taxes once, company taxes are paid quarterly. A corporation owes taxes if it estimates the tax amount due for the year and makes a quarterly payment to the IRS on the 15th day of the 4th, 6th, 9th or 12th month of the year. If the company uses the calendar year as its tax year, the payments are due on 15 April, 15 June, 15 September or 15 December.