In the United States, corporate tax is imposed at the Federal, state and local levels on the income of business organizations treated as corporations for tax purposes. The federal tax rates imposed on a company’s taxable earnings generally vary from 15% to 35%. State and local rules and taxes vary by authority, though most are based on the central government notions and designations. Taxable income differs from book income because of the tax deductions and the timing of income in determining what is to be considered as taxable income. Also, the corporations are subjected to the federal Alternative Minimum tax and other alternative state taxes. Company like individuals, must file tax returns each year. They are obliged to make estimated tax payments on quarter yearly basis. For the controlled groups of corporations, they have the option of filing consolidated returns in place of tax returns.
Some company transactions are not charged to tax. They include most company dealings during formation, liquidations, acquisitions and some types of mergers. For stockholders of a company, they get taxed on dividends distributed by companies. In some instances, firms may be charged foreign income taxes, or even be granted foreign tax credits for such taxes. Stockholders of most companies get taxed indirectly on corporate income, by paying taxes on dividends they receive from those companies. Though, the stockholders of mutual funds and S companies are taxed on company income when it is recognized, and hence they do not pay any tax on dividends they pay out to shareholders (Ault, 2005).
Corporate income tax is levied at the federal level, on every entity treated as corporation. Other local authorities also charge income tax on company earnings. Corporate income tax is a tax charged on all local and foreign companies attributing their income or carrying out their transactions within the authority of the United States federal government. For federal purposes, firms treated as companies and controlled under the rules of any state is a local or domestic corporation. While for state purposes, businesses operated in that particular state are considered as domestic corporations, and firms controlled outside a particular state are treated as foreign companies. Companies which are not recognized as C companies are referred to as S corporations and mutual funds. For some of these corporations, they are not taxed at the corporate tax rate, and the stockholders get taxed on the company’s income when it is realized.
Local firms are taxed on their global income at both the federal and state levels. Corporate income tax is based on the net taxable income as stipulated under federal or state laws. Usually, taxable income for a company is total income–both business and non-business earnings less cost of sales–less allowable tax deductions. Some corporations and some defined incomes are allowed tax exemptions. However, tax deductions on interest and other payments to related parties are subjected to some limitations (Hoffman William H. Jr., 2010).
Generally, the federal tax year must be 12 months roughly 52/53 weeks long, but corporations have the option of choosing their tax year. The tax year does not necessarily need to correspond to the financial reporting year of the company, and also it need not correspond with the calendar year, provided that the books of accounts are maintained for the specific tax year. Firms may change their tax year, an activity which needs the consent of the Internal Revenue Service. Commonly, most state income taxes are determined on the same tax year as the national tax year. Company income taxes are imposed at graduated scale rates. At higher rates of income, the lower rate brackets are phased out. The taxable income is charged to tax at 34%-35% where taxable incomes exceed $335,000. Tax rates imposed below the national level differ extensively by control, ranging from below 1% to over 16%. Both local and state income taxes are allowed tax deductions in the computation of national taxable income (Bittker, 2000). Boris I. Bittker, J. S. (2000).
Groups of companies are allowed at the federal level and by some states to file a single return for the associates of a unitary or controlled group, commonly referred to as consolidated returns. The consolidated return reveals the collective taxable incomes of members and the combined tax payable by those companies. Where related parties fail to file a consolidated return, they are subjected to transfer price rules. Under transfer price rules, taxes and prices charged to related parties may be adjusted accordingly by the tax authorities. Stockholders of companies are taxed separately on the allocation of company incomes and profits in form of dividends. Tax rates levied on dividends at present are lower than those charged on ordinary income for both individual and corporate shareholders. To ensure that stockholders pay taxes on dividend income received, two withholding tax requirements apply: withholding tax on foreign stockholders and backup withholding done on some local shareholders.
In the United States, all companies coming under its jurisdiction must file tax returns which are normally a self assessment of tax the firm is expected to pay. Corporate income tax at the federal, state and county level is payable in advance installments or also in estimated payments. Companies come under the obligation of withholding tax by simply making some payments to others, for example payments which include wages and dividend distributions. Incase the company fails to collect and remit those taxes to the tax authorities, they may be penalized and forced to pay taxes on the amounts not withheld for tax purposes as stipulated, despite not being a direct tax liability of the company.
Filing federal taxes for companies is different; it depends on whether it is a C corporation or an S corporation. Each has an exceptional national tax prerequisite and application. In actual fact, it is not all companies that file tax returns. Some small firms are elected as S companies and they pass on their earnings on to their shareholders in full. For S companies they must have lesser than 75 shareholders in order to file for taxes. They operate like partnerships, except that they give owners additional legal safeguard from court cases as opposed to the traditional partnerships. Basically, S corporations are treated as partnerships for tax purposes, but the tax forms are slightly more complicated than those of partnerships–All earnings and losses are turned over to the owners of these companies and a report is filed in each owner’s tax return. Owners of the S companies also make reports of their earnings and operating costs on Schedule E (William A. Raabe, 2008).
On the other hand, C companies are corporations that are treated as individual legal entities from their owners for purposes of tax. They are companies whose separate legal being has been formed exclusively for the reason of running a business. The main drawback of registering a company as a C corporation is that profits earned are double taxed — both as a corporate body and also on dividends paid to shareholders. Also, taxation of companies is very complex, and it involves filling out numerous tax forms. Hence, the need for most companies to have good accountants.
The central government does not consider sole proprietorships as separate legal entities from their owners for purposes of tax. Sole businesses report all the business incomes in their personal tax obligations as the only financial report they must prepare for tax purposes. For most of the sole traders, they file their firm’s tax returns as part of their personal form 1040 tax obligation by using the additional two-paged form, Schedule C, in which both the profit and loss of the business is indicated (Hoffman, 2010).
Sole-traders must also pay both halves of the employer and the employee’s side of social security and Medicare taxes—double the amount an employee would pay normally. Sole proprietors pay social security taxes at the rate of 12.4%, and Medicare at2.9% based on the net profit realized by the business and not the total profit realized–that is, income tax is computed after all the costs and running expenses have been subtracted from the revenue earned during a particular financial year. Sole-traders should make use of the Internal Revenue Service’s form Schedule SE, for the purposes of figuring out the self-employment tax amount they owe on behalf of their businesses.
In the U.S., both employees and employers are obliged to contribute to the Medicare and social security systems. Employees share equally the tax obligations of Medicare and social security with their employers, with each paying 6.2% of the tax contribution which is the employee’s payment for social security up to an income of $90,000 after 2005. For Medicare, both the employee and employer pay 1.45% towards the Medicare tax. There is no salary restriction in relation to the amount that should be remitted towards Medicare. This activity is done on a quarter year basis, whereby the employer must file the federal Form 941–Employer’s Federal Tax Return that has details on the number of employees who were paid wages, bonuses, tips or other forms of remuneration and rewards in a particular quarter.
In the Form 941, there are some specific details that should be included in the form. They include: the employees who got wages, tips or other rewards in the remuneration period, total of all wages, tips and other payments to employees, total tax from wages, tips and other payments that have been withheld by the employer, taxable Medicare and social security wages, total amounts employees received for sick pay, adjustments for employee group-term insurance on life and also for tips received, amount of income tax withheld, income advanced to employees and finally, the tax burden amount per month.
For most new employers, they start by making monthly deposits for tax amounts due using Form 8109. Also, the employer can use payment vouchers either a Federal Reserve branch or from an approved bank, authorized by the central government to collect such taxes on its behalf. In addition, those deposits can be made online using the Internal Revenue Services’ electronic Federal tax payment system
Businesses structured as partnerships do not pay taxes as separate entities. Instead, the tax is shared out among the partners, whereby each partner pays taxes on the income they earn from the business. The whole information file for a partnership is known as Form 1065. The necessary data collected is filed in the K-1 schedule inclusive in Form 1065. This information includes the partner’s share of income, allowable deductions and tax credits allowed to partners. The schedule K-1 form is either filled in by the business accountant or by the partners themselves.
Every partner who receives a Schedule K-1form should is required to detail the recorded income on the personal tax return that is on the Form 1040, by adding a supplementary form called the Schedule E, Additional Income and Loss earned. Schedule E is used in reporting income sourced from more other arrangements besides the partnership arrangements. It also has sections for mortgage investments, real estate, trusts, royalties, rental and estates. However, not unless one is engaged real estate rental businesses, one is only required to complete page 2 of Schedule E. The Part II of Schedule E–indicates incomes or losses from either a partnership or an S corporation, income or loss is reported as either being passive or non-passive proceeds.
The Federal Unemployment Tax fund (FUTA) and state unemployment funds necessitate employers to remit taxes in order to fill those unemployment funds. For Federal Unemployment Tax fund, employers pay a national rate of 6.2% on the first $7,000 that each employee in the United States earns. Fortunately, the tax paid to the state can serve up as a credit towards the sum that one must pay to the central government.
Each state stipulates its own unemployment tax rate. Most of the states as well levy extra fees to cover for job-training programs and administrative expenses incurred. These states use four dissimilar ways of computing the amount needed in paying the FUTA assessment: The first one is benefit ratio formulae, it involves determining the ratio of benefits collected by former employees to a company’s entire payroll over a period of the preceding three years. States adjust ones rate depending upon the general balance in a particular state’s unemployment insurance fund. The second method is the benefit wage formula. It involves determining the fraction of a company’s payroll that is paid out to workers who become unemployed and receive benefits and then dividing that number by the company’s total taxable wages.
The payroll decline ratio formula is the third method used in assessing the amount of unemployment taxes to be paid. It focuses on the decline in a company’s payrolls on either yearly, half yearly or quarterly basis. The final method used is referred to as the reserve ratio formula method. It entails determining a company’s balance in the unemployment reserve account. The reserve account is calculated by summing up all the contributions and posting them in the account and then deducting all benefits paid. The final amount is consequently divided by the company’s total payroll. The lower the reserve ratio, the higher the required contribution rate and the reverse is true.
Application of these methods can be very complicated, therefore the best option is to consult a tax advisor on the how to set the unemployment rate of the company in consideration. This ensures that company directors receive additional information as regards the factors which may impact on the FUTA tax charge increasing it, and also on how companies can best minimize the tax. The Internal Revenue Service notes that not all small businesses are operated in the same manner. The tax forms a business should complete is largely dependent the type of small business one is operating and the number of employees it has. When filling out federal tax forms, businesses should give special concern to hiring a certified public accountant to assist in handling business finances for the firm.
Depending on the form of business, the kinds of taxes a firm pays or the forms that need to be filled in, in paying those taxes are very different. For sole proprietorships to start with, they fill in form 1040 and Schedule C or C-EZ for income tax, form 1040 and Schedule SE for self- employment tax, form 1040-ES for estimated taxes, form 941 or 943 for farm employees on employment taxes, form 940 or 940-EZ for federal unemployment tax and form 8109 for depositing of employment taxes in banks that are authorized by the federal government. For partnerships, for the business purposes they fill in form 1065 for annual returns of income, form 941 or form 943 for farm employees for employment taxes. While on the other hand, individual partners fill in form 1040 and Schedule E for income tax, form 1040 and Schedule Se for self-employment tax and form 1040-ES for estimated taxes.
C corporations and S corporations fill in form 1120 or 1120-A for C corporations for income tax, while S corporations only fill in form 1120s for income tax purposes. C corporations also fill in form 1120-W and form 8109 for estimated taxes and form 1040-ES for employment tax. S company shareholders fill in form 1040 and Schedule E for income tax and form 1040-ES for estimated taxes. But shareholders of C companies are not required to fill in any forms regarding assessment of tax.
Limited liability companies commonly referred to as LLCs are created under Acts of parliament or state laws. For tax purposes, LLCs are treated as general partnerships, and the laws, rules and taxes applicable to partnerships apply. Although, one can opt to file tax returns as either a sole proprietorship, an S corporation or even as a C corporation. However, such companies should bear in mind that each state applies its own rules for the limited liability companies within their borders.
The Internal Revenue Service specifies that business forms can deduct a wide range of business operating costs from their taxes. However, for those operating expenses to be tax allowable, they must be incurred ordinarily and necessarily for the purpose of the business. Tax allowable expenses include: expenses incurred in the running and maintenance of home offices if one works from home , business rent, health insurance, utilities, vehicle expenses, telephone expenses, business travel, postage, retirement schemes, office furniture and supplies as long as they are not capital expenses, stationery, business cards, internet access, professional services and consultations received by the business, interest paid on business credit cards and business meals and entertainment as long as they are not exaggerated expenses.
The central government through the Internal Revenue Service has also stipulated those expenses that are not deductible from tax payable. They include: demolition expenses, lobbying for customers expenses, anticipated liabilities, personal expenses, political contributions to political parties, federal income taxes, fines and penalties for breaking the law like parking fines, bribes and kickbacks and expenses incurred on recreational and social clubs just to name a few. It is vey important to consult with tax advisors and accountants when in doubt on specific expenses which are either allowable or disallowable deductions in order to avoid penalties later by the IRS for allowing or disallowing expenses against the stipulations of the IRS (Burke, 2007).
In the United States, there are more than ten thousand different sales taxes charged nationwide, which keep on changing constantly, hence the need for a business to keep up with the changes. Businesses that provide services or even sell products within a particular state are obliged to collect sales taxes on behalf of the federal government, which they submit to the respective tax authorities. The services to tax differ from state to state. There are only five states in the U.S that do not charge sales tax on products sold and services offered.
The sales tax and collection process follows the following setup. The company should file an application with the sales tax authority of the state or local authority in order to obtain a certificate of authority to resell. The forms should include yearly, half yearly or quarterly tax estimates. The next step is receiving instructions from the state tax authorities on the frequency of tax collections and where to remit them. After which they are expected to submit the collected taxes at the places and time stipulated by either the state or local tax authority (James Pratt, 1994).
The estimated business taxes should be paid on specific days each and every year, unless otherwise stipulated. For corporations, the tax due should be submitted on April 15, June 15, September 15 and January 15. That is, the estimated company taxes fall due on the fifteenth day of the 4th, 6th, 9th and 12th month, after the end of the company’s financial year. The tax payments should be made earlier or on those specific days, not later than the due dates. For corporate federal tax returns, they are due on the fifteenth of the third month after the close of the company’s financial year (Roach, 2006).
For different forms of businesses, the rules applied in paying the estimated taxes are also different. In case of C corporations, the form 1120-W should be used for the estimated tax purposes in order to determine how much should be paid. On the other hand, sole proprietorships, partnerships, and S corporation shareholders, the form 1040-ES should be used in estimating the tax payable by the individuals. These businesses should remit their tax returns on April 15, same as individuals for the past year.
Numerous advantages accrue to businesses for registering companies as separate legal entities. For instance, the owners enjoy limited liability on company debts as opposed to unincorporated business forms like partnerships, in which members are liable for business debts on their wealth. However, this calls for more expenses in hiring accountant and business experts to carry put the complex business transactions. For unincorporated businesses, they have unlimited liability on company debts but they however are not double taxed like companies.