Understanding US Business Taxes: Corporation tax and Federal taxes
As soon as you land in the US you will be subject to taxation, and tax-related questions will increasingly become a consideration in many of your commercial decisions. Whilst it may have become a cliché that trading in the US is like trading in 50 separate markets, this couldn’t be more the case when thinking about tax.
Tax in the US operates at Federal, State and in many cases district level. Getting tax guidance in place should be seen as a key part of the initial US setup process, and may be as simple as getting the right accountancy practice managing this for you.
US taxation can be roughly divided into:
Corporation tax is collected at a Federal, State, and in some instances, district level. Corporation tax is applied at graduated rates to the net profits (“earnings” or “profit”), which is the gross profits minus the cost of staff salaries, rent and additional costs. In this regard, many businesses will only become eligible to pay corporation tax in full when they become profitable. Even when they do return a profit, specific deductions can also delay the point at which corporation tax is payable.
The level of corporation tax paid at a State level varies, with six States not charging corporation tax at all and up to 12 per cent in tax being charged in some States on top of Federal contributions. Where a company may operate in multiple States, it will typically be expected to apportion the level of corporation tax across multiple States.
In 2016 for corporation tax, the Federal level varied between 15–39 per cent. and additional State tax varied from 0–12 per cent. payable on net profits.
Alternative minimum tax places a minimum threshold of tax, equivalent to 20 per cent. of net profits (November 2016), to ensure that Corporates pay a minimum amount of tax and that any dispensations and tax credits are not aggregated to the extent that a company does not pay any tax. There are however exemptions to this, such as for companies where the annual turnover for the first three years is less than $5m.
Social Security & Medicare
These two separate taxes are often referred to as payroll taxes and are typically deducted from payroll on an ongoing basis and are processed by a PEO or payroll provider. Both of these payroll taxes are paid at Federal level and are normally paid quarterly.
Social security is currently (Nov 2016) charged at 12.4 per cent on an employee’s salary up to a maximum cap of $127k (recently increased). Medicare contributions account for an additional 2.9 per cent. tax on an employee’s salary. This combines to give a total tax of 15.3 per cent. on the total payroll which is split equally between employer and employee. As a result, an employer should expect to contribute 7.65 per cent. of an employee’s salary in payroll taxes and the remaining 7.65 per cent. is paid by the employee.
Unemployment tax (Federal Unemployment Tax Act — FUTA)
An employer must contribute at State and Federal level for Unemployment Tax. In 2016 this was charged at 6 per cent. on an employee’s salary but with 5.4 per cent. of this refundable if an employer paid unemployment tax at a State level. This tax is paid until an employee’s year-to-date wages exceeds $7k. As a result, the maximum amount paid is approximately $420 per employee. Additional State contributions for these taxes are applicable in some areas and similarly these thresholds are subject to State-by-State differences. These are shown clearly in the ADP payroll tax table.
You might also like:
- Understanding US Business Taxes: Sales Tax, Franchise Tax and Property Tax
- Understanding US Business Taxes: Reporting, Team, & Key Challenges
Where to go next
Check out our Dropbox for a range of additional resources;
- Corporation tax: AMT article, and here; Corporation Tax by State;
- Payroll tax: Really useful table produced by ADP showing payroll taxes by State; a more political take on the role of payroll taxes; when to submit payroll taxes; IRS employers tax guide with detail on payroll taxes;
Given the specialist and technical nature of these topics, speaking to accountants and advisors such as those below is strongly suggested:
- Eric Collins, Frank Hirth;
- Bradley Smallberg, Schissel Smallberg;
- Don Dismuke, Dixon Hughes Goodman
- Greg Capitalino, Kranz Associates; and
- Michael Hamilton, KPMG.
Thanks in particular to John and Kevin at Antidote, Keith at Graze, Katherine at Semafone, Eric at Frank Hirth, Bradley at Schissel Smallberg, and Greg at Kranz Associates for your help in researching this topic.
This blog and those in this series are aimed at helping entrepreneurs learn about the US market, what it takes to start here, and ultimately what it takes to succeed here. Many of the topics (if not all) are complex and it is best to view these blogs as a basic introduction from which you the entrepreneur must triangulate to your own specific set of circumstances — and invariably it will be sensible and appropriate to seek third party professional advice.