Who Is Liable For Corporation Tax: Everything You Need to Know
Knowing who is liable for corporation tax can be an ongoing issue for various businesses, as sole proprietorships, limited liability corporations, and corporations are all taxed differently.3 min read
Knowing who is liable for corporation tax can be an ongoing issue for various businesses, as sole proprietorships, limited liability corporations, and corporations are all taxed differently. If you are a business owner, understanding the structure of how your company was established will help you in understanding how to correctly pay your business tax. After all, you certainly do not want to be one of the businesses who is contributing the over $100 billion that is owed in taxes, according to the Internal Revenue Service.
How Is a Sole Proprietorship Taxed?
If you are a business owner who operates a sole proprietorship, the government is going to view you (as the business owner) and the company as essentially being one in the same. So, what does this mean for you insofar as your business taxes are concerned? Basically, it means that the IRS does not tax the business, but rather it taxes the income of the business owner, as the owner of a sole proprietorship owns all the assets and liabilities of the business.
How Is a Partnership Taxed?
Partnerships are not taxed all that differently from a sole proprietorship. However, rather than just one person being responsible for the assets and liabilities of the business, the various partners are responsible for paying the taxes as part of their respective personal income tax.
How Is a Limited Liability Corporation Taxed?
A limited liability corporation, also known as an LLC, can be taxed a bit differently depending upon the number of people involved. For example:
- If registered as an LLC, but having only one member, it is going to be treated as a sole proprietorship
- If an LLC has co-owners, then it will be taxed the same way as a partnership
- Liability for unpaid taxes are treated the same way in an LLC as they would be for either a sole proprietorship or partnership, depending upon the number of members
With that said, an LLC can choose to be treated as a corporation for tax purposes.
In the case of corporations, they are viewed as separate entities from the owners, therefore the owners do not include the taxes for the business in with their personal income taxes. Even though the company’s owners may not personally be on the hook for having to pay corporate taxes, if they are employed by the company, then they will have to pay personal taxes on that income. Additionally, if the corporation pays dividends to it’s shareholders, then they are personally responsible for reporting that on their personal taxes and paying, accordingly.
Only the taxable profits earned by the company will be subjected to taxation, as there are some expenses that are tax-deductible. Some tax deductible expenses include:
- Salaries and bonuses paid to employees
- Costs that are associated with the medical and retirement benefits of employees
- Company start-up costs
- General operating expenses
Many companies will keep a very close eye on these various expenses as a means of reducing the amount of money on which they will have to pay taxes.
While salaries and bonuses are tax deductible, dividends are not. As such, just as the shareholder must report any dividends received on their personal taxes, the corporation must report it as well. This means that dividends that are paid out, are basically taxed, twice.
Generally speaking, this is only an issue for larger companies whose shareholders are not necessarily employees; in the case of smaller companies, the shareholders frequently are employed by the company, and therefore are only paid a salary, which is tax deductible for the corporation.
While sole proprietorships and partnerships are generally only paying taxes at the end of the calendar year, as it is the owner (or, owners) who are paying the taxes, personally, a corporation has a different pay schedule. Corporations are required to file an IRS Form 1120 and estimate the amount of taxes owed (based on income, deductions and the corporate income tax rate) on a quarterly basis, on the 15th of the appropriate months. This means that on the 15th of every April, June, September, and December, the IRS is going be expecting the quarterly tax payment from a corporation.
If you need help with understanding who is liable for corporation tax, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.