Taxes frustrate a lot of Americans, but the funds procured from them are utilized by the United States government to build, repair and maintain infrastructure, provide emergency disaster relief and fund numerous programs. Social Security, major national health programs (i.e., Medicare, Medicaid, CHIP) and defense and international security programs all are funded through taxes.
Personal income tax was not officially a part of U.S. revenue until 1909, when Congress passed the 16th Amendment to the Constitution. Then, in 1913, that amendment was ratified, reinstating the federal income tax.
In 2023, the U.S. government raised $4.439 trillion in taxes, down from $4.9 trillion the year prior. The problem is that they spent $6.13 trillion last year, leaving the country with a $1.70 trillion deficit.
In this blog, we’re going to dive a little deeper into the subject of income tax, including outlining corporate and income tax and the primary differences between the two. This is only an overview, though, so be sure to contact a seasoned tax professional for information on your specific tax situation.
What Is Corporate Income Tax?
Businesses in the U.S. fall into different categories, mainly C and S corporations. C corporations are defined by the Internal Revenue Service (IRS) as independent legal entities owned by their shareholders. The IRS requires both C corporation businesses and their owners (shareholders) to pay income taxes.
S corporations, conversely, are considered pass-through entities that pass tax liabilities to their individual shareholders who are then taxed on the income at their personal rates on their income tax returns. Because they are taxed less heavily than C corporations, the number of S corporations continues to grow.
In general, the corporate income tax applies to institutions such as corporations running a business inside the U.S., corporations originated in the country and foreign enterprises with a permanent establishment in America. Another example is corporations that are residents inside the U.S. for tax purposes.
The profit of a C corporation — consisting of the revenue it makes in sales minus the cost of doing business — is taxed twice, once as business income at the entity level (corporate income tax) and again at the shareholder level (individual/personal income tax) when distributed as dividends or realized as capital gains. Corporate income taxes are paid at the corporate rate instead of a personal tax rate. Since the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, the federal corporate income tax rate is 21 percent.
Businesses classified as C corporations are taxed on income earned anywhere in the world, not only in the U.S. Although it is a markedly smaller amount than individual income and payroll taxes, the U.S. corporate income tax is the federal government’s third-largest source of federal revenue.
Most states — 44 plus the District of Columbia — also require corporate income taxes from C corporations, although the rate varies. Minnesota levies the highest state corporate income tax (9.8 percent), while North Carolina is the lowest rate (2.5 percent). South Dakota and Wyoming do not tax business income, and Ohio, Nevada and Washington tax gross receipts instead of income. The State of Texas levies a franchise tax on all businesses, including S corporations. Only sole proprietorships are exempt from this tax.
What Is Individual/Personal Income Tax?
This type of income tax, which in most cases is levied at both the state and federal level, helps fund things like Social Security, transportation infrastructure, the nation’s schools and other public services and government obligations. It’s placed on the annual earnings of individuals, corporations, trusts and other legal entities and typically consists of wages, salary, investments and some other forms of taxable income.
Individual income taxes are the U.S. government’s largest source of tax revenue. The percentage of the income of a business or individual taxed depends on how much is made and the filing status. Personal or individual income tax can be calculated by adding all forms of taxable income earned during the tax year, finding the adjusted gross income (AGI) and subtracting any eligible deductions from the AGI.
As with corporate income tax, not all states have income tax. Those that do typically follow the federal definition of taxable income. Although individual income tax usually is levied by the state in which the income is earned, some states and municipal authorities impose it on income of businesses or individuals working in their jurisdiction.
What is the Difference Between Corporate and Income Tax?
Corporate income tax mostly varies from its individual counterpart in that it is a tax on profits, not gross income. It is a flat tax rate of 21 percent, whereas individual income taxes are based on seven marginal tax rates ranging from 10 to 37 percent — depending on income.
Another difference between the corporate and individual income tax is that for C corporations, it is separate from the business owner’s personal tax. Pass-through entities such as S corporations pay the individual tax rate on combined business and personal income. Businesses paying corporate income tax use Form 1120 to file; those paying individual income tax utilize either Schedule C or Schedule K-1. Shareholders should report their S corporation income on Schedule E of their individual tax returns.
What is the Current Tax Rate Structure?
The United States levies a progressive individual income tax in which rates increase with income. To reflect inflation, the IRS has the ability each year to adjust income thresholds for each federal tax bracket, helping to prevent taxpayers from ending up in a higher tax bracket if their cost of living is raised, which is sometimes referred to as bracket creep.
Unlike the federal corporate tax rate, which is a flat 21 percent, the current income tax rates are set at:
| Tax Rate | Single Filers | Married Filing Jointly | Heads of Households |
| 10 percent | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
| 12 percent | $11,600 to $47,150 | $23,200 to $94,300 | $16,550 to $63,100 |
| 22 percent | $47,150 to $100,525 | $94,300 to $201,050 | $63,100 to $100,500 |
| 24 percent | $100,525 to $191,950 | $201,050 to $383,900 | $100,500 to $191,950 |
| 32 percent | $191,950 to $243,725 | $383,900 to $487,450 | $191,950 to $243,700 |
| 35 percent | $243,725 to $609,350 | $487,450 to $731,200 | $243,700 to $609,350 |
| 37 percent | $609,350 or more | $731,200 or more | $609,350 or more |
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Filing taxes is not something most people prefer to do, especially if they are going through the process as a business owner. Tax laws vary, and changes are regularly made to the IRS’ Tax Code. By investing in the services of experienced tax professionals, you can focus on your business priorities.
At StenTam Tax Services, we take a proactive approach to tax planning, analyzing your financial situation and developing customized strategies to minimize your tax burden while maximizing your financial goals. And, we deliver the expertise and solutions typically found in Fortune 500 companies to small and mid-size businesses, giving you a competitive advantage in the marketplace. Contact us today to get started!
