Key Takeaways

  • The main difference between S Corp vs C Corp taxes lies in how income is taxed: C Corps face double taxation, while S Corps enjoy pass-through taxation.
  • C corporations pay a 21% federal corporate income tax and shareholders also pay personal tax on dividends.
  • S corporations avoid corporate tax but must still pay payroll taxes and report all profits or losses on shareholders’ personal tax returns.
  • Certain state taxes apply differently—some states impose corporate taxes on S Corps, while others only do so on C Corps.
  • C Corps can offer a wider range of employee benefits and deductions, while S Corps are limited in these areas.
  • S Corps have ownership restrictions, while C Corps have greater flexibility for investors and stock options.

The difference between C Corp and S Corp for taxes is that C-Corps pay corporate taxes but S-Corps do not. In addition, C corporations are, in some states, subject to corporate state taxes, which S corporations may not be required to pay.  

C-Corps and S-Corps: Similar But Different 

Some LLCs and corporations can decide to be taxed as S-Corps if they anticipate getting tax savings when they make the switch. Such businesses inform the IRS of their decision using Form 2553. Choosing entity taxation classification is a major decision which business owners need to go about with care. It is best to involve a professional tax lawyer because the decision will have lasting tax consequences. 

The two entities have a few taxation similarities:

  • The owners of both entity types pay income tax.
  • Both businesses are responsible for withholding and paying payroll taxes for shareholder-employees and other employees.

S corporations and C corporations have a number of taxation differences both on the federal and state levels.

Understanding How S Corp and C Corp Taxes Work

When comparing S Corp vs C Corp taxes, the biggest distinction lies in the IRS tax treatment. A C corporation is taxed as a separate legal entity and must pay corporate income tax on its earnings. After taxes, any profits distributed to shareholders are taxed again as dividends on their personal returns, creating double taxation.

An S corporation, on the other hand, functions as a pass-through entity. It doesn’t pay corporate income tax. Instead, profits and losses “flow through” to shareholders, who report them on their individual tax returns. This helps owners avoid double taxation while still benefiting from limited liability protections.

However, S Corps are required to pay reasonable compensation to shareholder-employees, subjecting that portion of income to payroll and Medicare taxes, while remaining profits distributed as dividends avoid these taxes.

Federal Tax Differences

Corporate TaxC corporations are viewed as separate entities by the IRS. They file and pay corporate tax using Form 1120. S-Corps, on the other hand, do not pay corporate tax. Form 1120S filed by S-Corps is solely for information purposes. Using this form, the S corporation reports its net profit or loss for the year, but they are the incomes and losses that are passed through to the individual owners who report to the IRS on their individual tax returns. The owners must report and pay personal income tax whether they received the earnings or not. 

Example C Corporation Imagine a C corporation that has a single shareholder and makes a profit of $500,000. If the business is a C corporation, it will lose about 21 percent or $105,000 of its profits to corporate tax. This will leave the owner with a dividend of $395,000. If the owners' personal income tax rate is 33 percent, then he would pay an extra $130,350 as personal income tax leaving him with $264,650.

Example: S Corporation If the same business was an S corporation, the owner would not pay corporate tax, and the entire $500,000 would pass through as a dividend. This would be taxed at a rate of 33 percent or $165,000 leaving him with $335,000.

Income TaxIn both entity types, shareholders must pay income tax on dividends or distributions. From the 2018 tax year, personal income tax rates range from 10 percent to 37 percent depending on the amount earned. An S-Corp must issue every shareholder a Schedule K-1 that shows the portion of earnings allotted to them. Each shareholder reports the income on their K-1 on his personal returns. 

Taxes on BenefitsC corporations are suitable for companies that want to give benefits like life insurance, health insurance, and disability insurance to owner-employees. C corps can deduct the cost of those benefits from the taxes of the shareholder if the Corporation actually offers those benefits to at least 70 percent of its employees. That deduction is not available to S corporations.

Drawing Money From the BusinessAny funds drawn from the business by a C corporation shareholder is classified as a dividend and is subject to double taxation. The exception to this is when the money is a reimbursement for a business expense or a loan repayment. S corporation owners, on the other hand, can draw money from the business without being subjected to double taxation.

State Taxes Differences

On the state level, the differences between the two business types vary according to state. In some states, there is no difference in the way the state taxes the two types of corporations. In most states, both entity types must pay the following taxes:

  • Franchise taxes. These tend to be higher for C-Corps compared to S-Corps.
  • Sales tax–if the business is involved in selling.
  • Workers' compensation insurance.
  • Unemployment insurance.
  • States also usually impose an extra lawyer of personal income tax on the incomes of both C corporation and S corporation shareholders.

The main difference in the tax treatment of the two corporation types is that some states only levy a state corporate on C corporations and not S corporations. This tax is in addition to the federal corporate tax. However, some other states levy the same tax on S corporations. 

S-Corp status tends to favor small businesses while big businesses that have the goal of getting funds by selling stock globally do not qualify to be S-Corps. 

State-Level Tax Treatment of S Corps and C Corps

State taxation varies widely for S Corps vs C Corps. While many states follow federal tax rules, others impose additional levies:

  • C Corps: Most states tax C corporations at both the corporate and shareholder levels, mirroring the federal double-taxation model.
  • S Corps: Some states, including New York and New Jersey, levy a small corporate tax or franchise fee even for S Corps. In others, such as Florida and Texas, S Corps may be fully exempt from corporate income taxes.

It’s important for businesses operating in multiple states to understand each jurisdiction’s rules, as the difference can affect profitability and cash flow.

Choosing Between an S Corp and a C Corp for Tax Purposes

When evaluating S Corp vs C Corp taxes, consider the following factors:

  1. Reinvestment Strategy: C corporations are ideal for businesses planning to reinvest profits, as retained earnings are taxed only once at the corporate level until distributed.
  2. Distribution Strategy: S corporations suit small businesses that distribute profits regularly, minimizing exposure to double taxation.
  3. Ownership Structure: S Corps can have up to 100 shareholders, all of whom must be U.S. citizens or residents. C Corps have no such limit and can issue multiple stock classes.
  4. Growth Goals: If you plan to seek venture capital or go public, C Corp status is preferred due to its investor flexibility and scalability.

Consulting with a business tax attorney or CPA can help determine which structure aligns best with your financial goals and tax strategy. You can find experienced corporate attorneys on UpCounsel’s legal marketplace for personalized assistance.

C Corp vs S Corp Tax Rates

  • C Corporation Tax Rate: A flat 21% federal corporate income tax rate applies to C corporations, regardless of income level. State corporate taxes may also apply, ranging from 0% to over 10% depending on the state.
  • S Corporation Tax Rate: S corporations themselves don’t pay corporate taxes. Instead, shareholders pay personal income tax on their share of business profits at rates between 10% and 37%, based on their individual tax bracket.
  • Payroll Taxes: S Corp owners must pay self-employment taxes only on their salary (not total profits), which can reduce overall tax liability.

This setup can make S Corps more tax-efficient for small to mid-sized businesses, while larger corporations often prefer C Corp status for reinvestment and growth opportunities.

Deductible Benefits and Fringe Tax Rules

C corporations can deduct a broader range of benefits and expenses from their taxable income, including health insurance premiums, life insurance, and retirement contributions. These deductions can significantly lower a company’s taxable income.

By contrast, S corporation shareholders owning more than 2% of the company cannot deduct these benefits tax-free—they must report them as income. This makes C Corp structures advantageous for companies that offer robust benefit plans to executives or large teams.

Frequently Asked Questions

  1. How is an S Corp taxed compared to a C Corp?
    An S Corp passes income, losses, deductions, and credits directly to shareholders for personal tax reporting, while a C Corp pays taxes at the corporate level and again on shareholder dividends.
  2. Can an S Corp pay corporate taxes?
    Generally no. However, some states require S Corps to pay a small franchise or excise tax even though they’re exempt from federal corporate income tax.
  3. What is double taxation in a C Corp?
    Double taxation occurs when a C Corp pays corporate income tax on profits, and shareholders pay taxes again on dividends received from those profits.
  4. Which has more tax deductions—S Corp or C Corp?
    C Corps typically have more deductible benefits, such as employee health insurance and retirement contributions, making them beneficial for companies with many employees or higher expenses.
  5. Can a company switch between S Corp and C Corp status?
    Yes. A business can change its tax classification by filing Form 2553 to elect S Corp status or revoking that election to return to C Corp status, though timing and IRS approval rules apply.

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