Double taxation may not be the first thing you think of when starting a new business. However, it's an essential aspect for corporation owners to consider as it affects their company and their shareholders.
Double taxation isn't avoidable, and it applies to other income sources. Here's what corporation owners should know about when it comes to double taxation.
What is Double Taxation?
Double taxation refers to the act of paying income taxes twice on the same income. It can occur in three scenarios, explained below:
- Income from corporations taxed for the corporation and its members
- International investment or international trade
- Loans, such as a 401k loan
Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.
Which Business Entities Experience Double Taxation?
C-Corporations, or C-Corps (also known as just “corporations”), are the only business entity that experiences double taxation. Other business entities have different ways of paying taxes that don't involve a second form of payment.
What are the Tax Rates for Corporations and Individuals?
As of the most current tax year, there is a corporate tax rate of 21%. This first tax applies regardless of how much the corporation earns annually.
Their earnings will be taxed for individual shareholders in a corporation according to their federal income tax bracket. This tax bracket depends on whether you file as:
- Head of household
- Married (filing jointly)
- Married (filing separately)
- Single
Tax rates for individuals and the tax owed will depend on the dividends received from your corporation.
The exact amount that you’ll owe can vary significantly. For example, the minimum and maximum tax rates, the taxable income bracket, and the tax owed depend on your filing status:
Head of household:
- 10%: $0 to $14,100; 10% of taxable income
- 12%: $14,101 to $53,700; $1,410 plus 12% of the amount over $14,100
- 22%: $53,701 to $85,500; $6,161 plus 22% of the amount over $53,700
- 24%: $85,501 to $163,300; $13,157 plus 24% of the amount over $85,500
- 32%: $163, 301 to $207,350; $31,830 plus 32% of the amount over $163,300
- 35%: $207,351 to $518,400; $45,926 plus 35% of the amount over $207,350
- 37%: $518,401 or more; $154,793.50 plus 37% of the amount over $518,400
Married, filing jointly:
- 10%: $0 to $19,750; 10% of taxable income
- 12%: $19,751 to $80,250; $1,975 plus 12% of the amount over $19,750
- 22%: $80,251 to $171,050; $9,235 plus 22% of the amount over $80,250
- 24%: $171,051 to $326,600; $29,211 plus 24% of the amount over $171,050
- 32%: $326,601 to $414,700; $66,543 plus 32% of the amount over $326,600
- 35%: $414,701 to $622,050; $94,735 plus 35% of the amount over $414,700
- 37%: $622,051 or more; $167,307.50 plus 37% of the amount over $622,050
Married, filing separately:
- 10%: $0 to $9,875; 10% of taxable income
- 12%: $9,876 to $40,125; $987.50 plus 12% of the amount over $9,875
- 22%: $40,126 to $85,525; $4,617.50 plus 22% of the amount over $40,125
- 24%: $85,526 to $163,300; $14,605.50 plus 24% of the amount over $85,525
- 32%: $163,301 to $207,350; $33,271.50 plus 32% of the amount over $163,300
- 35%: $207,351 to $311,025; $47,367.50 plus 35% of the amount over $207,350
- 37%: $311,026 or more; $83,653.75 plus 37% of the amount over $311,025
Single filers:
- 10%: $0 to $9,875; 10% of taxable income
- 12%: $9,876 to $40,125; $987.50 plus 12% of the amount over $9,875
- 22%: $40,126 to $85,525; $4,617.50 plus 22% of the amount over $40,125
- 24%: $85,526 to $163,300; $14,605.50 plus 24% of the amount over $85,525
- 32%: $163,301 to $207,350; $33,271.50 plus 32% of the amount over $163,300
- 35%: $207,351 to $311,025; $47,367.50 plus 35% of the amount over $207,350
- 37%: $311,026 or more; $83,653.75 plus 37% of the amount over $311,025
Work With the Pros
Double taxation can be a tricky tax principle to navigate, and it's crucial to get the details correct. Have questions about double taxation for your small business? Work with the pros to get the answers you need.
