Owning a business is a wonderful thing, but deciding how you want to structure it for legal and tax purposes can be a bit confusing. You’ll have to choose between registering as an LLC, S corporation, C corporation, or a general partnership. While your accountant will be able to help identify which type of organization will be best for your needs, you’ll still want to take the time to familiarize yourself with the differences. Here, the experts at CSI Account Solutions in Colorado Springs, CO, explain the most common tax differences between S-Corp and C-Corp organizations.
3 Tax Differences Between S and C Corporations
1. Tax Filings
Both S and C corporations are required to file federal taxes, just like every other business organization. However, the forms you use to calculate the taxes your company owes will differ. S corporations must offer tax information to each investor based on their earned returns for the year using a 10 K-1 form. Additionally, these businesses must calculate their taxes owed using the 1120S form. C corporations, on the other hand, are only required to calculate the organization’s income tax, as they typically do not have independent investors with interest in the company.
2. Tax Rates
These two types of corporations do not receive the same tax rate. C corporations must pay federal income tax on reported profits as well as any corporate taxes required by their state. This means C corporations may end up paying taxes twice. S corporations are not subject to federal income tax. Instead, the profits and losses are filed on an individual basis and assessed at the individual’s income tax rate for their total earned income for the year. Your accountant will be able to help you calculate your individual tax rate.
3. Payroll Requirements
Payroll may seem fairly straightforward. However, for C and S corporations, it’s important to pay attention to the details. C corporations are not required to report dividend earnings of shareholders as wages since they are subject to both federal and state income tax. However, since S corporation businesses are not subject to the same double taxation as C-Corp businesses, they must report all dividends paid to shareholders as wages in their regular payroll process. This prevents anyone involved in the corporation from creating a tax shelter. By reporting the dividends as wages, each investor is responsible for paying all associated taxes.
Whether you’re running a sole proprietorship or operating a C corporation organization in the Colorado Springs area, let an accountant at CSI Account Solutions help you file your taxes. Their experienced team specializes in the needs of small and medium-sized businesses, and will work to help you get the most out of your refund. Learn more about their accounting services online and call (719) 344-5837 to schedule a consultation.