Breakdown of Taxes U.S. Companies Must Pay

Operating a business in the U.S. is exciting, but it also comes with several complications related to tax obligations that you must address. From federal and state tax filing to local and franchise taxes, each comes with its own set of rules, forms, and deadlines.

For founders juggling product, growth, fundraising, and more, handling taxes yourself can become a distraction with costly consequences. In this guide, we break down the key elements of U.S. business taxes, helping you stay compliant and focused on scaling your company.

3 Primary Parts of Annual Income Tax Filing 

There are three main types of taxes that a U.S. company has to pay - federal, state, and local. This section will educate you about how and when your business is eligible to pay these taxes.

1. Federal Taxes

The United States federal income tax is levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. 

C-corporations are taxed at a flat rate of 21% on their annual profits. Other entities like S-corporations, partnerships, and multi-member LLCs typically don’t pay taxes at the corporate level.

21% might look like a lot, but the U.S. corporate tax rate isn’t as high as in countries like Australia, France, or Korea.

Every active corporation in the U.S. has to file a federal tax return annually. It doesn’t matter if your company has zero revenue or incurred losses. For startups making a loss of no profits, this means filing a ‘zero return,’ clearly stating the business has no taxable income. Skipping federal taxes in any case isn’t an option.

To file federal taxes, you must fill out and submit different forms depending on your entity type:

• C-corporations file Form 1120 to report income, deductions, and tax credits.
• S-corporations file Form 1120-S to report profits, losses, and pass-through income.
• Partnerships and multi-member LLCs file Form 1065 to report their income and each partner’s share.

Like IRS forms, deadlines for federal tax returns also depend on your entity structure. For C-corporations, returns are due by the 15th day of the 4th month after the fiscal year-end. For calendar-filers, that’s April 15th.

Pass-through entities (S-corps and partnerships) must file earlier, by the 15th day of the 3rd month after the fiscal year end. March 15th for calendar year filers.

2. State Taxes

State taxes are separate from federal taxes and are imposed by individual state governments. Unlike federal taxes, state tax obligations differ widely depending on the state where your business is located and operates. Most states levy taxes on business income, sales, and employment, but rates and requirements vary significantly.

For example, states like Wyoming and Nevada don’t levy corporate income taxes, which makes them attractive to certain businesses. However, states like Minnesota (9.8%) and Illinois (9.50%) have relatively higher corporate income tax rates, impacting businesses differently based on industry and revenue.

Here’s a diagrammatic explanation of how high or low state taxes in the U.S. are:

The forms you need to file state income tax vary based on your business’s operating location. For example, if you operate your business in California, you must file Form 100 and Form CT-3 for New York.

To stay compliant, you must file relevant state-specific forms typically available from each state’s Department of Revenue or similar agency. Deadlines for these filings also vary, but often align closely with federal deadlines.

Sales and employment taxes are components of state taxes that we will talk about in the latter half of the article.

3. Local Taxes

Local taxes are imposed by city or county governments and vary widely based on jurisdiction. These taxes typically fund local infrastructure, public services, and community development initiatives. Unlike federal and state taxes, local taxes differ significantly even within the same state, depending on the city or county where your business operates.

Common types of local taxes include property taxes, local sales taxes, gross receipts taxes, and business license fees. Major cities like San Francisco and New York impose additional gross receipts or local income taxes on your business, creating another layer of complexity.

Each city or county has unique requirements regarding tax filing and payments. It's essential for you to understand their local tax obligations thoroughly, as non-compliance often results in substantial fines or penalties. To manage these obligations effectively, consult your local tax authority or work with professional tax services. 

Firstbase Tax Filing offers resources and expertise to simplify local tax compliance, ensuring your business remains on track and avoids unnecessary complications.

Franchise Tax

A total of 13 states in the U.S. levy a franchise tax on businesses. It’s a specific type of state tax imposed on businesses for the privilege of operating within a particular state. Unlike traditional corporate income taxes, franchise taxes are typically based on your company's net worth, capital stock value, gross receipts, or might even have a fixed fee structure, rather than profits alone. Think of it as a fee your business has to pay to maintain the right to operate legally within the state's boundaries.

Franchise taxes don’t replace federal and state income taxes. They are paid in addition to them. They are sometimes paid annually at the same time that other taxes are due, and other times paid separately to the state. Sign up for Firstbase Agent Autopilot for each state you operate in to let Firstbase handle your franchise tax requirements for you. 

Although some businesses are exempt from paying this tax, one common exemption criterion is business size, with many jurisdictions offering exemptions or reduced tax rates for small businesses. Apart from business size, you can be exempt from paying the franchise tax if:

• Your annual revenue and total assets are less than a certain amount decided by the state in which your business operates.
• You run a nonprofit organization, governmental entities, and certain cooperatives. Basically, any business that benefits society.

When it comes to requirements and rates, franchise tax rates vary significantly from state to state. 

Some states, such as Delaware and Texas, have distinct franchise taxes based on intricate formulas, like authorized shares or gross receipts, making it crucial for founders to understand and comply with each state's unique requirements carefully. States like Alabama and Georgia use a more straightforward approach, charging a flat fee or a rate based on net worth or paid-in capital. 

However, the complexity lies not just in understanding the calculation method but also in accurately filing appropriate forms and making timely payments. In states with franchise taxes, deadlines typically align closely with the annual corporate filings.

Employment Taxes

Employment taxes are mandatory payments your business must make if you have employees. These taxes fund critical programs such as Social Security, Medicare, unemployment insurance, and other employee benefits. Both employers and employees typically share these costs, but remember, your business is primarily responsible for accurately withholding and remitting these taxes to the respective authorities.

You are responsible for withholding your employees’ taxes from their paychecks and paying them to the government.

There are two primary components of employment taxes:

1. The Federal Insurance Contributions Act (FICA) covers Social Security and Medicare. Employers and employees each contribute 7.65% (totaling 15.3%) of an employee’s salary, with the employer responsible for withholding the employee’s portion from paychecks and paying both portions to the IRS.
2. You pay the Federal Unemployment Tax Act (FUTA) taxes to fund the unemployment compensation program. The current FUTA rate is 6% on the first $7,000 paid to each employee annually. You receive a 5.4% credit (in most states) for paying state unemployment insurance taxes on time, and this lowers the effective FUTA rate to just 0.6%

You must file regular employment tax returns, quarterly or annually, using forms like Form 941 (quarterly federal tax return) and Form 940 (annual FUTA return).

Other Taxes

Beyond the above-mentioned taxes, you should also be aware of some other taxes you might or might not encounter while operating your business:

1. Excise taxes: Imposed on particular goods and services, like fuel, alcohol, tobacco, or telecommunications.
2. Property taxes: If your business owns any real estate or tangible personal property like equipment, vehicles, and inventory, it will be subject to property taxes.
3. Gross receipts taxes: Some states, like Nevada and Washington, or local jurisdictions impose taxes based on total revenue or gross receipts, regardless of profitability. 
4. Environmental taxes: If your business is in certain industries like manufacturing, chemical processing, oil extraction, or any other industry that’s related to the environment, you might need to pay this tax.

Taxation Based on Your Business Structure

Your choice of business structure significantly impacts how much tax you will pay to the IRS.

C-corporations are distinct because they face double taxation. First, corporate income is taxed at the federal (21%) and often state levels. Then, when dividends are distributed to shareholders, these profits are taxed again at the individual level. 

Despite this disadvantage, the C-corporation structure benefits companies aiming to reinvest profits for growth.

That’s because retained earnings, i.e., profits kept within the business, are only taxed at the corporate level and not again at the shareholder level unless distributed. This allows C-corps to reinvest more capital into hiring, product development, or expansion without triggering additional tax obligations for shareholders, making it an attractive choice for high-growth startups that don’t plan to issue dividends in the early stages.

S-corporations offer pass-through taxation, meaning the business itself doesn't pay federal corporate income taxes. Instead, profits and losses pass through directly to shareholders who report them on their personal income tax returns. This avoids double taxation and offers substantial tax savings. 

Partnerships operate quite similarly to pass-through taxation. Your business pays no entity-level federal income tax; instead, partners report their share of profits or losses on personal returns. General partners must also pay self-employment taxes on their share of business income. Partnerships offer flexibility but require diligent record-keeping to clearly define each partner's financial responsibilities and tax liabilities.

Limited Liability Companies (LLCs) have a flexible tax structure by default, with multi-member LLCs taxed as partnerships. LLCs, however, can elect to be taxed either as an S or a C-corporation. In some states, LLCs may also owe franchise or minimum business taxes, irrespective of profits.

Use Firstbase Tax Filing to File All Your Taxes with Ease

Firstbase Tax Filing lets U.S. companies file taxes in minutes, accurately. The platform helps you with all three types of taxes:

• IRS filing: Covers federal taxes like income, employee, and business deductions; applies to all U.S. businesses.
• State filings: States vary in tax requirements, like income, sales, and franchise taxes, specific to where you operate.
• City filings: Some cities require additional filings for business licenses, local taxes, or specific revenues.

Firstbase has several tax professionals available to help you at every stage of your tax filing process. You can chat or book a call with these professionals at your convenience.

The pricing for Firstbase Tax Filing is clear and transparent. For C-corps and multi-member LLCs, it costs $1,799 annually to get started. For foreign-owned single-member LLCs, it costs $899 annually.

U.S. tax filing is a tricky and time-consuming process. Sign up for Firstbase Tax Filing, and let us deal with your taxes.

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