Learn how tax rates of corporations and individuals compare, plus the difference in taxes paid by corporate businesses and other types of small businesses.
What’s the Difference Between Corporate Tax Rates and Personal Tax Rates?
That same law also changed personal tax rates, which now range from 10% to 37%, depending on income. The lowest tax rate applies to single individuals with incomes of $10,275 or less and married couples filing jointly with incomes of $20,550 or less. The highest tax rate applies to single individuals with incomes over $539,900 and married couples filing jointly with income over $647,850. This is for tax year 2022. These income thresholds may change from tax year to tax year.
Business Entities and Taxes
Corporations, sometimes called “C corporations,” are the only business entity that pays business taxes directly based on the taxable income of the business. Sole proprietors, members (owners) of limited liability companies (LLCs), partners in partnerships, and owners of S corporations are taxed as pass-through entities. That means they report their business income on the owner’s individual income tax return, and they pay taxes based on the individual’s tax rate. With a pass-through entity, the net income of the business is added to the owner’s other income, deductions, and credits to get to a total income level. The total taxable income then is taxed at the applicable tax rate. For example, if your taxable income, including your business income, is at the 37% level, that’s the tax rate used to calculate your income taxes for the year.
Tax Forms
Corporations use tax form 1120. Sole proprietorships and single-member LLCs report business income using Schedule C. The taxable amount is “net profit or (loss).” Owners of multiple-member LLCs (classified as a partnership unless it elects to be treated as a corporation), partners in partnerships, and owners of S corporations report using Schedule K-1. Owners of corporations are shareholders and their income from the business is in the form of dividends. They report this dividend income on Form 1099-DIV.
Other Considerations Affecting Business and Personal Tax Rates
In addition to the income tax paid as a small business owner or by a corporation, there are other factors to consider in analyzing corporate versus personal taxes.
Double Taxation on Owners of Corporations
Owners of corporations are subject to double taxation on corporate income, meaning that they pay taxes twice on the same dollar of income. The corporation pays one tax on the corporate level and the individual owner(s) pays a second tax at the individual tax level on dividends distributed to the owner(s). If the corporation doesn’t pay dividends and reinvests or holds onto its after-tax earnings, the value of its stock will go up, and that leads to capital gains.
Self-Employment Taxes
Everyone who works in the U.S. must pay Social Security and Medicare taxes. Small business owners (not including corporate shareholders) must pay these taxes in the form of self-employment taxes. The tax rate is 15.3%. These taxes aren’t withheld from a paycheck, so they must be paid directly, based on the net income of the business, and they are included in the taxable income of the business owner. Most small business owners make quarterly estimated payments including both estimated income taxes and these self-employment taxes.
The Bottom Line
Looked at simply, corporations pay income tax separately from the tax situation of their owners, so it’s difficult to compare tax rates of corporations and individuals. There are many variables and each tax situation is unique. Spend some time with a licensed tax professional to consider all factors affecting how corporate and individual income tax rates affect the amount of taxes you pay as a small business owner.
