The new 21 percent tax rate for the C corporation is very attractive at first blush and you may wonder if this would be a better entity of choice. As a tax CPA, I have been getting these questions from some clients.

The table below gives you a snapshot on how much you would pay in taxes. This depends on your Form 1040 tax bracket. In the S corporation column are the tax rates by the brackets that apply to individuals. In the C Corp column is the percentage of taxes you would pay if you were a C Corp (it adds the last four columns).

S Corp v C Corp - Which is Best for You?

How Does the Table Work?

Let’s take an example if you are in the 34 percent tax bracket. Let’s also say that you have $100,000 in profit (or taxable income).

If you operate as an S corporation you will end up getting a K-1 that has $100,000 of profits for the year to include as part of your individual 1040 return (this is called a pass-through since the $100,000 in profit is not taxed at the S Corp level, but passes through to your individual return). The profits on the K-1 pass-through to you pay your Form 1040 taxes at the 34 percent rate, for a total tax on your S corporation profits of $34,000.

If you operate as a C corporation, then the math gets a bit more involved. The profit is first taxed at the C corporation level at a rate of 21 percent (for a tax of $21,000 that the Corporation pays). This leaves $79,000 of the $100,000 in profits available. These will be distributed as a dividend to you.

Tips From a Tax CPA

To get this money, you then must endure the double taxation (double taxation means it was already taxed at the C Corporation level and it will be taxed at the individual level on the form 1040). This starts with the tax on the dividend of 15 percent. This creates an $11,850 tax ($79,000 x 15 percent).

Your tax bracket will also trigger the net investment income tax (NIIT) that applies because of your dividend income. The NIIT is $3,002 ($79,000 x 3.8 percent).

As a C corporation, your total federal taxes on the $100,000 of income are $35,852, which consists of the following:

1. C corporation taxes of $21,000
2. 1040 dividend taxes of $11,850
3. 1040 NIIT of $3,002

Based on the same $100,000 in profits, operating as an S corporation results in $34,000 to the government compared with the C corporation, which pays $35,853.

There are no NIIT on the S corporation profits if the shareholder materially participates in the S corporation. In other words, the NIIT does not apply to the pass-through income derived from active business operations.

Based on the table I have presented you can see that the S Corp will always beat the C Corp where the taxpayer materially participates in the operation.

Based on tax considerations alone, there is no reason to switch from an S Corporation to a C Corporation.

Talk to a Tax CPA

If you’re still not sure which option is right for you, Unalp CPA Group is here to help. Contact us today by calling (435) 938.6389 or send a quick message by clicking this link. Let’s chat!