As a business owner, you are concerned about tax liability every year. Depending on your levels of revenue and expenses, taxes can vary from year to year. If you have registered your company as a c corporation, then you may have experienced “double taxation” before when year-end financial reports are due, on what you owe for tax on retained earnings for a C corporation.
Your double taxation as a C corporation begins as you make a profit. Federal tax laws allow C corporations to retain up to $250,000 without penalties. Tax on retained earnings in a C corp applies after the $250,000 limit. This non-penalized amount may only be used for business reinvestment towards assets (such as real estate) or research and development. Paying dividends to shareholders as cash is an issue of double taxation. An alternative option is to give dividends in the form of stock dividends.
Your business will declare retained earnings on all profits after dividends are paid. Tax on retained earnings in a C corporation may be complicated if dividends are paid in both cash and stock. Make sure you keep an accurate record of each payout, recording times and amounts in their respective accounts. If you are unsure of the accounting in your efforts, please reach out and consult with your accountant.
When your business filed as a C corporation, you may have been aware of the high tax rate regarding your earnings after paying salaries. This tax on retained earnings in the C corporation is high than in the S corporation or LLC. After the 2017 Tax Act passed, the C corporation rate was cut down to 21% from the previous 34% rate. While this was a significant reduction, the C corporation tax bracket still stands higher than both S corporations and LLCs. Regarding the leftover earnings or “retained earnings”, 79% of this amount would be available to reinvest in your company’s growth.
As your business grows as a C corporation, you should be aware of the tax implications involving your business filing. Tax on retained earnings in a C corporation is typically higher than in other business types. Be sure to consult with your tax advisor regularly to determine how much should be withheld, and what can be paid out to shareholders, and calculate the optimized amount for reinvestment.