1 of 4

Write now Article Tools

Page 2 of 3

also the simplest. Like every other business with employees your C Corporation must apply for an EIN, or Employee Identification Number. To do this you must file an SS-4 before beginning business.

Filing Annual Federal Taxes

Unlike other business structures a C corporation does not report its income on the owner's Form 1040 because it is a separate entity from its owner. Instead, profits or losses are filed on Forms 1120 or 1120-A.

Example: Ryan and Cory have a costume shop which they ran as a partnership until this year. Last year when they filed their tax returns they reported their business income on their Schedule C. Then they carried their profit onto their Form 1040. Now they have incorporated and report their corporation's income on a Form 1120 and report their salaries and dividends on their personal income tax returns.

Owners' Income

Shareholders of C corporations have two ways that they can pay themselves from their corporation. First they can receive payment through dividends. Dividends are income from stock or mutual funds and are taxed by the corporation and then again on the owners Form 1040. Some dividends are not taxed immediately, for instance funds placed in a retirement account. Most shareholders avoid taking income from dividends because of the "double tax". There are some situations when taking dividends is better and doing so is more common in larger companies.

Another more prudent option is having the corporation hire the owners as employees and pay them through salaries and bonuses. These are both counted as business expenses so the company doesn't pay taxes on them. To do this the shareholder must be actively working in the company and being paid a reasonable salary for their work. All income earned will have employment taxes withheld and be reported on the individual's Form 1040 at the ended of the year.

Example: Riley starts a painting business and decides to incorporate. After reviewing his finances he realizes that paying himself dividends would create a huge tax burden on himself and his company. So Riley hires himself as an employee and pays himself a reasonable salary. Every week he gets a check with his employment tax withheld. At the end of the year after writing off all of the companies expenses there is still income left so he pays himself a bonus. He also leaves $20,000 in the corporation to cover next years expenses. The company pays the tax on this, which was less than Riley would have paid at his marginal tax rate.

Income

• << previous page
• 1
• 2
• 3
• next page >>

Add your voice

Know something about Tax aspects of C corporations?
We want to hear your view. Write now!