Your company’s tax liability largely depends on the business structure you choose. And if you structure your business as a corporation, you’re responsible for paying the corporate income tax rate on company earnings. So, what is the corporate tax rate?
How do corporation taxes work?
A corporation, or C Corp, is a type of business structure where owners enjoy limited liability protection. Corporations are separate legal entities, meaning they are separate from their owners. Owners are not responsible for their corporations’ actions and debts (hence limited liability).
But because corporations are separate legal entities, they are subject to double taxation. 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, 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.
So if you structure as a corporation, you need to know the corporation tax rates.
What are corporate tax rates?
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. So, how much are corporate taxes?
Federal corporate income tax rate
First things first: what is the federal corporate tax rate? The current corporate tax rate (federal) is 21%, thanks to the Tax Cuts and Jobs Act of 2017.
Prior to the Tax Cuts and Jobs Act, there were taxable income brackets. The maximum tax rate was 35%.
The corporate tax rate applies to your business’s taxable income, which is your revenue minus expenses (e.g., cost of goods sold).
Federal Corporate Tax Rate Example
Let’s say you have annual revenues of $250,000 and qualifying expenses of $55,000. You want to figure out how much you owe in federal taxes.
First, subtract your expenses from annual revenues:
Taxable Income = $250,000 – $55,000
Taxable Income = $195,000
Next, multiply the federal corporate tax rate of 21% (0.21) by your taxable income:
$195,000 X 0.21 = $40,950
You would owe $40,950 in federal corporate taxes.
State C Corp tax rates
Most states set a corporate tax rate in addition to the federal rate. State corporate income tax rates range from 0% – 9.99%. But, not all states levy a corporation tax rate.
The following states do not have a state corporate tax rate:
- South Dakota
Nevada, Ohio, Texas, and Washington levy gross receipts taxes on corporations instead of corporate taxes. A gross receipts tax is a tax on a business’s gross receipts, which includes the business’s total revenue without deductions (e.g., operating expenses).
South Dakota and Wyoming do not have state corporate income taxes at all.
Keep in mind that some states have both corporate income tax and gross receipts tax.
Some states apply a flat tax to all corporations while others use brackets. The states with brackets apply tax rates based on the corporation’s taxable income.
Use the chart below to find corporate tax rates by state:
|State||State Corporate Tax Rate|
|Alaska||0% – 9.4%|
|Arkansas||1% – 5.9%|
|Hawaii||4.4% – 6.4%|
|Illinois||7% (+2.5% replacement tax)|
|Iowa||5.5% – 9.8%|
|Kansas||4% (+ a 3% surtax on net income in excess of $50,000)|
|Kentucky||4% – 6%|
|Louisiana||3.5% – 7.5%|
|Maine||3.5% – 8.93%|
|Mississippi||3% – 5%|
|Nebraska||5.58% (+7.50% on taxable income of the excess over $100,000)|
|New Jersey||6.5% – 9%|
|New Mexico||4.8% (+5.9% of excess over $500,000)|
|New York||6.5% – 7.25%|
|North Dakota||1.41% – 2.9%|
|Oregon||6.6% – 7.6%|
|Vermont||6% – 8.5%|
Contact your state for more information on your corporate tax rate.
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 change up 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.
This article has been updated from its original publication date of August 13, 2019.This is not intended as legal advice; for more information, please click here.