How is a corporation taxed?
For tax purposes, there are two types of corporations; subchapter C (a regular corporation) and subchapter S corporations. C corporations are separate tax payers. They pay taxes on their own income; the shareholders are not taxed on corporate income. The corporation files a Form 1120 with the federal government and a form 5 with the state. If income is distributed to shareholders in the form of dividends, the corporation does not receive a deduction for the dividend distribution, buy the shareholders must pay tax on the income. This is referred to as double taxation corporations.
A subchapter S corporation is taxed as a partnership, and is merely a conduit for tax purposes. All the income and losses flow through to the shareholders in proportion to their shareholders. As in a partnership, distributions do not determine the amount taxable to the shareholders. A subchapter S corporation files Form 1120S. Both regular C corporations and subchapter S corporations must pay FUTA and the employer's share of Social Security and Medicaid tax. The officers may, but are not required to be, employees of the corporation. The corporation must withhold an employee's share of Medicaid and Social Security and withholding taxes and remit the withheld tax to the government.
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