The C corporation pays a progressive tax, that is, the tax rate rises as income increases. Like individual taxpayers, all income is taxed, both ordinary and capital gains. Unlike individ- ual taxpayers, capital gains are added to ordinary income and taxed like ordinary income at the firm’s marginal tax rate.
States and local jurisdictions may also impose corporate income taxes. In some areas, this local tax takes the form of a gross receipts tax.
Employment
The principal employment tax is Federal Insurance
Contributions Act (FICA), a combination deduction to pay Social Security and Medicare benefits. This tax is shared equally by the employer and the employee. The combined rate is 15.3%. The Social Security portion is 12.4%, up to a salary ceil- ing that adjusts each year for inflation. The Medicare share is 2.9% on all wages.
For each employee, then, the employer pays 6.2% up to the salary ceiling and 1.45% for the total salary. People who are self-employed pay a tax that serves as FICA, at a rate of only 7.65%. However, if self-employed people hire employees, they must pay the employer’s FICA share.
The federal unemployment tax, FUTA (Federal
Yes, You Too Can Lose the Business, Part I A sure way to lose the business is to not pay income withholding tax.This money is withheld from paychecks to pay the employees’ federal and state income tax liability.The legal view is that the employer is holding the employees’ money in trust to forward to the federal and state governments.Violating that trust can draw a sharper reaction than tax fraud.This way to run afoul of tax authorities is often combined with failure to pay the FICA tax.
For a manager, the warning signs are when a business is operating too close to the edge of its cash flow needs. Management is tempted to dip into these “trust” funds to get the business through a tempo- rary financing problem. One month rolls into another and soon the warning letters from the tax people turn into summonses.
Unemployment Tax Act), joins with individual states’ unemploy- ment taxes. The resulting FUTA/SUTA funds unemployment benefits for eligible people laid off or otherwise terminated. It is a smaller percentage, paid only on the first several thousand in salary. The employer pays this tax.
Transaction
The most common transaction tax is the sales tax. Each state sets its own tax rate and collection policies. Sometimes, locali- ties are also authorized to add a percentage to the state’s sales tax. Only a handful of states do not have a sales tax.
“Luxury” taxes are a special type of transaction tax. When government wants to discourage a certain type of economic activity or raise further revenue from a particular class, that activity is deemed a “luxury” and an additional tax applies to its purchase. Automobiles, fur coats, and imported items are fre- quent targets.
The most recent example of an ill-considered luxury tax was the yacht tax in the early 1990s. An onerous tax on boat pur- chases spurred a boycott, drove sales sharply down, and result- ed in thousands of job layoffs. In this case, it was a couple of golden eggs too many. When the tax was repealed, the industry rebounded.
Other types of transaction taxes include the various fees, stamps, and licenses that may relate to purchase of real estate, motor vehicles, or other major items. These charges may also
Yes, You Too Can Lose the Business, Part II Another way to lose the business is to fudge on the sales tax collection. State authorities conduct regular
sales tax audits. Since sales taxes are a major revenue source, the state tax people are especially anxious to collect.
The first couple of missed payments will only result in some fines, interest, and penalties.Tax authorities prefer that businesses continue to operate and pay off their tax liabilities. Repeat offenses can draw a sterner response. Read the local bankruptcy filings. Some are for fail- ure to pay sales taxes.
be considered user taxes. The money collected often directly funds the agency responsible for regulating the activity. Each state sets its own regulations.
Property
Property taxes are the exclusive jurisdiction of state and local authorities. The biggest property tax is on real estate.
Valuing commercial real estate often calls for more art than science. As a result, the assessment could be significantly skewed from market worth. If the assessment results in a higher tax, it could be beneficial to challenge it through the appeals process.
In addition to real property, businesses often face state and/or local taxes on personal property items used in the busi- ness. The business machines, computers, furniture, and all other fixed assets of the business have a tax applied each year of their useful life according to a depreciation schedule.
Afterwards, many jurisdictions continue to levy a tax as long as the item remains in service. Over time, a business could easily pay a multiple of the equipment’s purchase price in personal property tax.
Environmental
Environmental taxes include the severance tax and pollution control types of tax. Severance taxes apply to industries like
Consider the Tax Impact
Managers often overlook the personal property tax in the decision to buy a piece of equipment. Depending on the equipment and the jurisdiction, the property tax impact could sway a decision from buy to lease to rent to forget.
Another target for management attention, particularly in larger businesses, is the difference between personal property actually in service and personal property charged to the tax rolls. Many business- es forget to delete equipment from the tax property listing after it has been retired from service. An audit of this area often returns a size- able tax reduction.
mining and drilling. These taxes, covering the act of extraction, make up an important revenue source to states rich in natural resources.
The pollution control taxes are an attempt to overcome the condition known as the “tragedy of the commons.” This situa- tion refers to 18th century English village practice of having a plot of land where all could graze their sheep. Invariably, some people would seek to increase the size of their individual flock.
The booming sheep population would overgraze the commons, leaving the ground bare. What had been a resource for all was now a resource for none.
Mandated pollution controls like air and water scrubbers combined with noncompliance fines are intended to avoid this condition. Through taxing businesses for the cost of repairing or restoring resources common to all citizens, governments try to avoid environmental destruction. Environmental policy is a still evolving area of tax and regulation. Regulations are a tax or cost applied to business activities. These controls are often associated with extractive industries. Energy production, from coal-fired generating plants to the local gas station, gets a lot of attention. Many manufacturing processes use toxic chemicals whose runoff must be controlled.
Excise
Excise taxes stem from both federal and state actions. These taxes apply against a sin-
gle item. They are often called “sin” taxes, since they affect things like tobacco, whiskey, and gasoline. Businesses, usu- ally at the point of manu- facture, calculate and for-
ward the tax to the appropriate authority. The direct cost to business is only the record keeping and administration. The consumer pays the tax in the final cost of the item.
Excise tax A tax on the sale or use of specific serv- ices or goods other than
real estate, such as transportation fuels, telephone service, airline tickets, alcohol, and tobacco.
Miscellaneous
Miscellaneous taxes that can affect a business include tariffs on imported goods, franchise taxes, and occupational taxes.