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How Are Corporations Taxed Twice?

Jul 9, 2008
There are two types of corporations in the United States. One is known as an S Corporation and the other is the C Corporation. Most corporations today fall under the C category. This category is not just for big businesses either. Small businesses can also be formed as a C Corporation. Usually a C Corporation has a lot of shareholders while an S Corporation does not. If you do decide to form a C Corporation you will be subject to paying a double tax on your profits but if you are the only shareholder or the other shareholders of the company are also employees you can avoid this.

First off you need to know how the double taxation system works. The government and the IRS consider C Corporations separate taxpaying entities. Just like you they have a number assigned to them like your social security number. A corporation is identified by its employer's identification number or EIN. This number is used on all the tax documents you file and payments that are made to the IRS. As a C Corporation you business is responsible for paying a number of taxes. Payroll taxes are one and taxes on the profits of the business are another.

The double taxation system is very simple. At the end of the year when your accountant or tax professional is doing your tax returns the amount of taxes you owe will be calculated based on the profits your business earned for the year. That is your first tax. The second will be determined by the amount of the dividend you want to pay to the shareholders of the corporation. Assuming you are also a shareholder you will also get taxed on the dividend you are paid when you file your personal tax return on April 15th. That is how you are taxed twice on the same money.

If your corporation has only yourself as a shareholder or only a couple of shareholders that are also employees then there is a way to avoid being taxed twice. But the first thing you have to decide is what you intend to do with your profits. If you're trying to grow the business and you plan on leaving your profits in the business to fund your growth then you will only have to pay the first tax. As you will not be receiving a dividend anyway you'll only pay the tax on profits.

If you intend on putting your profits into your pockets then you'll want to avoid the corporate tax on profits. There is a very simple way to do this. Pay yourself ad your shareholders a bonus at the end of the year. You should be able to at least estimate your profits. And using this estimate you can determine the amount of bonus money the company can pay to its employee shareholders. You of course will still have to pay taxes on this money but because you won't be paying any taxes on your company's profits you'll be able to put that much more money in your pocket. Just make sure you write your bonus check before the end of the tax year.
About the Author
Cash Miller is an experienced entrepreneur and speaker who has spent over a decade as a small business owner. His years of experience in small business cover a variety of topics. If you are looking for more small business help please check out http://www.smallbusinessdelivered.com
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