Staying Compliant: Understanding the Tax Requirements for your C-Corporation in U.S.

As a C-corporation in the United States, staying compliant with U.S. tax laws is critical to avoid penalties and ensure the legal operation of your business. C-corp tax compliance involves knowledge of different types of taxes, due dates and deadlines, filing requirements, payment obligations, and other administrative tasks. In this article, we will explain the various taxes C-corporations need to pay (or just file) and provide guidance on how to stay compliant with U.S. C-corporation tax laws.

Please treat this article as general guidance, not as a legal or tax advice as the subject is highly complex, comprehensive and each case (like your specific company) may be different. Please also read the disclaimer at the bottom of this article.

In a nutshell:

• Do I need to file a tax return? Even if you have no activities, no income, no transactions, you must still file certain tax returns and may even have to pay some taxes. Failure to do so may result in severe penalties in many cases.
• Must file federal income tax return to IRS, even as nil income, due by April 15th of the following year. No tax payment maybe due but still have to file.
• Must pay your franchise tax to the state/s that you are registered and may also have to file an annual report to some states, as per state's deadlines (most start from March 1st as the deadline).
• Must assess and file/pax taxes to your city in the registered states (most start from March 1st as the deadline).

Let's dive into the specifics of these U.S. taxes and more.

Types of Taxes for C-Corporations

As with U.S. individuals or other companies, U.S. C-corporations need to file specific types of taxes. The typical tax requirements for C-corps include income tax, franchise tax, payroll tax, sales tax, and estimated taxes in general. Please note that depending on your entity type, commercial operations, shareholding structure, etc. there may be other tax or reporting or disclosure requirements. This list and guidance is by no means comprehensive or all inclusive but only covers the most general requirements for startups, please consult with us (or your accountant) for the specifics of your company's requirements.

Let’s break the most typical taxes down.

Income Tax

In the U.S., C-corporations need to pay federal, state, and local (city) income taxes - yes, taxes are due to 3 different authorities and filed to 3 different places. The taxes are calculated based on your corporation’s earnings during the fiscal year minus any deductions, losses, and credits.

Do I Need to Pay Income Tax?

• Federal income tax must be paid by any C-corporation that has generated a taxable income within the tax year. In very simple terms, taxable income means the taxable profit which is sales revenue less the deductible expenses incurred. Federal Income Tax rate for the tax year 2022 is 21% on the taxable income, payable either in advance with a process known as "payment of quarterly estimated taxes" or by April 15th of the following year. If you do not have a taxable income, then no tax will be due but the tax return still has to be filed.
• State income tax works slightly differently. Some states may not require any income taxes, while others will. Additionally, if your corporation operates in several states, you may be required to pay income taxes to more than one state. Check the state’s laws in which your business operates for specific instructions.
• Local (or city-based) income taxes vary widely by locality. As with the states, check the local government web pages your business operates in for its tax laws.

When Do I File and Pay Income Tax?

Federal income taxes for C-corporations need to be filed by April 15 of the following year. Extensions can be requested, which would give you until October 15 to file. However, you will still need to pay the taxes by the original date, even with the filing extension.

State and local income tax deadlines vary. Check with the local government office or work with a tax advisor to ensure you file these taxes on time.

U.S. taxes may seem straight forward and there are many tools and resources that guide the tax payers to file and pay online, using free self service platforms by IRS. There are also 3rd party paid tools to help owners or the finance teams to file their tax returns themselves. If you are not experienced or have some fundamental knowledge on U.S. taxes, it may be a better idea to use a certified tax professional and you can always schedule a free call with us to discuss our tax services. 

Franchise Tax (or State Specific Taxes)

C-corp tax filing requirements can also include franchise taxes. Delaware state calls this tax as franchise tax and other states may call it with a different name - we will refer these as franchise tax.

Franchise taxes are a tax for the ability to do business in a particular state. As with state and local taxes, franchise taxes vary by location. Oftentimes, they are paid annually along with your C-corp income taxes.

Do I Need to Pay Franchise Tax?

All C-corporations that do business in a state that levies franchise taxes will need to pay them. You may need to pay franchise taxes to several states if you have a business presence in multiple states that collect these taxes. Some C-corps may qualify for exemptions and some states require no franchise or fixed tax. Please check the requirements with your state.

When Do I Pay Franchise Tax?

Franchise taxes are due every year, but the deadline varies by state and mostly starts from March 1st. Check with your state’s laws to verify the date. For instance, Delaware Franchise Taxes and annual Reports are due no later than March 1st of each year. To learn more on how to file your Delaware State annual report and pay the franchise tax due by March 1st, please read our post linked here.

Payroll Tax

Payroll tax applies to your U.S. company if it has U.S. employees. Some founders confuse their team in other countries as employees. For more details on who is a U.S. employee and how to pay yourself and your team as Non-U.S. people, you can read our post linked here.

C-corp tax liability generally includes taxes that must be paid on employee earnings. These payroll taxes include the FICA tax, FUCA tax, federal income tax, and state income tax, which are collected from the wages, salary, and tips your employees earn.

Do I Need to Pay Payroll Tax?

Your C-corporation will need to withhold payroll taxes from your employees’ salaries and pay them to the government. How much you need to withhold will depend on a variety of factors. Additionally, payroll taxes are only withheld for employees and usually not independent contractors.

When Do I Pay Payroll Tax?

The deadline for paying payroll taxes varies. Federal income, Medicare, and Social Security taxes may need to be paid semi-weekly, monthly, or annually. Any state-specific payroll taxes will also have their unique deadlines. Ask a tax professional about your corporation’s specific payroll tax requirements.

Payroll taxes are very critical and equally critical component of having employees is the federal and state compliance. Paying the due taxes is generally not enough. Federal government and each state has its own specific and additional compliance and filing requirements. We provide HR & Payroll Services to our clients to ensure such compliance and more. Please schedule a free discovery call with us to discuss your needs.
 

Sales Tax

C-corporations that do business in the U.S. may need to collect and pay sales taxes. These taxes are collected from the purchaser and are then delivered to the government. The states and local governments are responsible for levying sales taxes, which means these taxes vary widely by each of the 50 states in the U.S.

Do I Need to Pay Sales Tax?

If your corporation operates in a state that levies sales taxes, you will need to collect the taxes from buyers at the point of sale. Sales taxes may be required from buyers for products or services, depending on the state’s laws. 

Again, as with state income taxes, you may need to collect sales taxes in multiple states if your business operates in states where sales taxes are collected. You may incorporate your company in Delaware that does not impose a state or local sales tax, but if you rent an office in California, you need to evaluate whether you’re doing business in CA as per state laws and collect sales taxes or not.

To assess whether you need to collect and pay sales tax in a state, you would need to check the below for each state that you operate in or sell/bill to:

Doing business in another state: It is usually assessed by having a Nexus or not. A company may have a physical nexus in a state, like the CA state office address, or an economic nexus triggered by a combination of annual sales value or number of sales transactions made to that state. The rules for each state differ.

Is the product or service you sell subject to sales tax: Again, each state differs and if you have a nexus in a state, you may want to check whether what you sell is subject to sales tax in that state or not, and what the sales tax rate is.

When Do I Pay Sales Tax?

Sales taxes are due according to the individual state’s laws. Filing and payment deadlines will depend on the state(s) in which your business operates. A tax advisor can help clarify if and when you need to pay sales taxes.
 

Estimated Taxes

While not a specific tax, your C-corporation may need to pay estimated taxes. Estimated taxes are calculated by estimating the total income tax you expect to pay at the end of the fiscal year and dividing this amount into four quarterly payments.

Do I Need to Pay Estimated Taxes?

C-corporations will need to make estimated income tax payments to IRS every quarter if they expect their total income tax to be $500 or more.

Some states also require estimated income tax payments. 

When Do I Pay Estimated Taxes?

These quarterly payments are usually due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. Check your tax return for the exact dates.

IRS's EFTPS platform enables tax payers to process their estimated tax payments with ease. If you don't already have access to your company's EFTPS platform with a PIN, you may want to sign-up ASAP from this IRS link following the Enroll button. 

Advisory Forms and Informative Tax Forms

U.S. tax law requires individuals and businesses to file certain forms for informational and payment purposes. Many of these forms are due annually but are for reporting and not paying, such as the income tax return you must file. Your C-corp may need to file some or all of the following forms.

Form W-2

You will need to file two copies of the W-2 form for your employees. By February 1 of each year, you will send one copy to the IRS and the other to the employee.

Form 1099

For C-corps, you will need to file a 1099-NEC form if you paid a non-employee $600 or more in the calendar year. If you did business with a vendor, you would also need to file this form.

Also, if your corporation paid dividends to shareholders, you must file a 1099-DIV form.

Form W-8BEN and Form W-8BEN-E

For C-corporations that run in the U.S., you will want any foreign independent contractors that perform work for your corporation to file a W-8BEN form before you pay them.

Likewise, if a U.S. C-corp does work with a foreign corporation, partnership, or other business entity, you will want them to send you a filled-out W-8BEN-E form.

Form 1120

A Form 1120 is, perhaps, the most important form you need to file. This is the IRS form for your corporation’s income tax. You will fill out the 1120 form and send it to the IRS annually. Essentially, this form helps you calculate your income taxes and is a report to the IRS of your business’s tax liability. With it, you calculate your corporation’s income, gains, losses, deductions, and credits.

Form 5472

For C-corps with 25% or more foreign ownership or for foreign corporations that do business in the U.S., you will need to file Form 5472. Filing this form can be complicated, and it is best to seek professional advice before doing so.

Other Filing Requirements

Other than U.S. "tax" authorities at federal, state or city/county level, other U.S. authorities may require certain filings at certain periods. It is more difficult to track and identify these and it makes it even more critical to work with a U.S. accountant so that you are informed about these. 

We are listing a few most common ones below but there may be others required from your specific company, industry or state.

Beneficial Ownership Information (BOI) reporting:

Every year in the United States, millions of small businesses are established as corporations, limited liability companies, or under other corporate structures. Unfortunately, these types of corporate structures can be exploited by illicit actors. They use shell companies and front businesses to hide their true identities and funnel their illegal earnings through the U.S. financial system.

This is why, on September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) released new guidelines for reporting Beneficial Ownership Information (BOI), as outlined in the Corporate Transparency Act (CTA). Subsequently, FinCEN began accepting beneficial ownership information reports on January 1, 2024.

 According to FinCEN “Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control a company.”

In other words, Beneficial Ownership Information is all about identifying the people who have a significant influence over a company, either by owning it directly or by having a level of control behind the scenes.

In this linked article, you can read more about BOI Reporting requirement and our step by step guide on how to file it, as well as go through our free self assessment to see whether you are required to file - and you probably are required.

BE-12 and/or BE-13 Reporting:

The BE-12 Benchmark Survey of Foreign Direct Investment in the United States is a survey conducted every five years encompassing numerous topics related to foreign direct investment in the US. The BE-12 Benchmark Survey gathers essential data and is mandatory for business owners subject to requirements set by the Bureau of Economic Analysis (BEA).

There is also the BE-13 Reporting requirement when you first incorporate your business, especially with foreign/Non-U.S. shareholders.

Depending on where your business falls under BE-12 or BE-13 survey requirements, you may have to file one of the for BE-12 forms at some point during your business ownership. We have explained the form types further below in this post.

Other Critical Information on Taxes

Tax Rates for C-Corporations

The tax rates for C-corporations in the U.S. will depend on the tax being paid, the location, and a variety of other factors. State and local income tax and sales tax rates can be determined individually by finding the laws on the local government website or contacting their office. Generally, for states that collect corporate income tax, the rate will be no more than 10%. The federal income tax rate for C-corps is 21% on taxable earnings. Use Form 1120 to calculate your corporation’s tax rate, or contact a tax advisor.

Deadlines for Paying Taxes as a C-Corporation

As has been mentioned, the deadlines for paying your taxes as a C-corporation will vary depending on the tax and the location. For federal income tax purposes, your Form 1120 will need to be filed by April 15 of the following year, and you will most likely need to pay estimated taxes every three months during the tax year.

Check with the local laws to determine when you need to pay state and local income taxes, sales taxes, payroll taxes, and franchise taxes.
 

Penalties for Late Taxes

There are some fairly steep penalties for filing and paying taxes late or neglecting to file or pay them at all. The exact penalties will depend on the laws of the specific taxing jurisdiction and the specific tax returns and the additional forms required to be filed. It is a highly complicated subject.

As an example, the penalty for filing your Form 5472 late (or grossly incorrect) is far from paltry. According to current laws, your corporation would be fined $25,000 per return, plus an additional $25,000 for each month you are late. There is no maximum penalty.

_{Tax Implications for Business Activities}

Tax implications can arise from specific business activities, such as:

• Hiring employees
• Exceeding state-determined sales thresholds by making sales
• Maintaining presence (e.g., store or office)
• Storing inventory

For instance, if your C-corporation decides to hire a few more employees, you will need to withhold payroll taxes from their salaries and file W-2 forms for them.

Each new branch office you open will have its tax liability as well. If you open a branch office in a state that collects state income tax, you will need to file and pay those taxes in addition to what you were paying before. Opening a branch office could also lead to sales tax, specific payroll tax, and franchise tax liabilities. Depending on the type of business and location, businesses may need to obtain licenses and permits to operate legally in some states.

You can check California as an example.

_{Do You Need Tax Help?}

Tax laws are constantly changing, and the information contained in this article is by no means comprehensive. With that said, it is best to get in touch with a tax advisor to determine what taxes your C-corporation needs to pay, when, and how. At Tukel Inc. Accounting, our tax professionals can help you calculate and prepare your tax returns and other forms. If all of these tax requirements for your C-corp seem overwhelming, schedule a free discovery call with one of our experts today, and let us help you with all your tax filing needs.

Disclaimer:

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Tukel Inc. is not responsible for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Tukel Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.}}