A C corporation is taxed twice on the same profits: the company pays a flat 21% federal income tax on what it earns, and shareholders pay tax again on any of those profits that come out as dividends. That two-layer structure is what people mean when they ask how C corps are taxed, and most planning around a C corp is really planning around when — and whether — the second layer hits.
The 21% Corporate Rate
Internal Revenue Code Section 11 sets a single flat rate of 21% on every C corporation’s taxable income, whether the company earned $50,000 or $50 million.1Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed The Tax Cuts and Jobs Act of 2017 made the flat rate permanent, replacing an older graduated system that topped out at 35%.2LII / Legal Information Institute. Tax Cuts and Jobs Act of 2017 (TCJA)
Taxable income is revenue — sales, interest, gains from selling business assets — minus allowable deductions like operating expenses, wages, and cost of goods sold. Corporations don’t get a preferential rate on long-term capital gains the way individuals do. A C corp’s capital gains are taxed at the same 21% as its ordinary business income.
What Double Taxation Actually Costs
After the corporation pays its 21%, what remains can stay in the company or go out as dividends. When it goes out, shareholders report the payment on their personal returns and pay tax again at individual rates.
Run the numbers on $100,000 of corporate profit. The corporation pays $21,000, leaving $79,000. Distribute all of that as a qualified dividend to a shareholder in the 15% bracket, and the shareholder owes another $11,850. Combined tax: $32,850 on the original $100,000, or roughly 33%. At higher individual brackets the combined bite grows.
Shareholders receive Form 1099-DIV each year showing what they were paid and how much qualifies for preferential rates.3Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
How Shareholders Are Taxed on Dividends
Qualified Dividends
Qualified dividends get the same preferential rates as long-term capital gains: 0%, 15%, or 20% depending on the shareholder’s taxable income.4Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions To qualify, the shareholder generally has to hold the stock more than 60 days during the 121-day window around the ex-dividend date. Dividends from domestic C corporations usually meet the test as long as the holding period is satisfied.
For 2026, the 0% rate covers single filers with taxable income up to about $49,450 and married couples filing jointly up to about $98,900. The 20% rate begins above roughly $545,500 for single filers and $613,700 for joint filers.
Ordinary Dividends
Dividends that don’t meet the holding period are taxed at the shareholder’s regular marginal rate, from 10% up to 37%. A top-bracket shareholder receiving non-qualified dividends can end up with a combined corporate-plus-individual burden above 50% of the original profit.
The 3.8% Net Investment Income Tax
Higher-income shareholders owe an extra 3.8% on dividend income under the Net Investment Income Tax. It applies to single filers with modified adjusted gross income above $200,000 and married couples filing jointly above $250,000.5Internal Revenue Service. Net Investment Income Tax For a top-bracket shareholder taking qualified dividends, the effective federal rate on the dividend itself reaches 23.8%, on top of the 21% the corporation already paid.
Getting Money Out Without the Second Layer
Double taxation only bites when profits are distributed as dividends. Every dollar the corporation pays out through a channel it can deduct reduces its taxable income and skips the corporate tax on that dollar entirely.
Reasonable Salary
An owner-employee can draw a salary, and the corporation deducts it as compensation. The IRS expects pay to be “commensurate with your duties.”6Internal Revenue Service. Paying Yourself Pay yourself too little and the IRS can reclassify part of a distribution as a disguised dividend. Pay yourself too much and the excess may be disallowed as a deduction. A defensible number is one you can back up with your role, hours, industry pay data, and the company’s revenue, with documentation kept on file.
Tax-Free Fringe Benefits
C corps have an edge over pass-through entities on fringe benefits. Certain benefits are fully deductible to the corporation and tax-free to the employee-owner receiving them:
- Health insurance premiums paid by the corporation.
- Group-term life insurance coverage up to $50,000.
- Educational assistance up to $5,250 per year in tuition or student loan payments.
- Qualified transportation benefits up to $340 per month in 2026 for transit passes or parking.
Each one lowers corporate taxable income while delivering real value to the shareholder-employee without triggering a second layer of tax.7Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits
Retirement Plan Contributions
The corporation can sponsor a retirement plan and contribute for employees, including owner-employees. Contributions are deductible to the corporation and not immediately taxable to the participant. Same effect as salary and fringe benefits: a dollar leaves the company as a deduction rather than as a dividend.
Keeping Profits Inside the Company
Profits kept inside the corporation have only been taxed once, at 21%. Retaining earnings to fund growth, pay down debt, or build reserves is fine. The IRS just doesn’t want corporations stockpiling cash purely to spare shareholders the dividend tax.
Section 531 imposes an accumulated earnings tax — an extra 20% on profits retained beyond the corporation’s reasonable business needs, on top of the regular 21%.8Office of the Law Revision Counsel. 26 USC 531 – Imposition of Accumulated Earnings Tax There’s a safe harbor: under Section 535(c), every corporation gets a minimum accumulated earnings credit of $250,000. Service corporations in fields like health, law, engineering, accounting, and consulting get $150,000 instead.9Office of the Law Revision Counsel. 26 USC 535 – Accumulated Taxable Income Below the threshold, the penalty doesn’t apply.
Above the floor, the corporation has to point to specific business justifications: planned equipment purchases, real estate acquisition, working capital tied to the business cycle, product liability reserves.10eCFR. 26 CFR 1.537-1 – Reasonable Needs of the Business Vague intentions aren’t enough. The IRS wants specific, definite, feasible plans supported by board resolutions and financial projections.
A Trap for Passive-Income Corporations
If a closely held C corp earns mostly passive income, a separate penalty tax kicks in. A corporation is a personal holding company when it meets both of these tests:
- More than 50% of the stock is owned by five or fewer individuals at any point during the last half of the tax year.11Office of the Law Revision Counsel. 26 U.S. Code 542 – Definition of Personal Holding Company
- At least 60% of adjusted ordinary gross income comes from passive sources like dividends, interest, rent, royalties, and annuities.12Internal Revenue Service. Entities 5
A corporation that meets both tests owes an extra 20% on undistributed personal holding company income, layered on top of the regular corporate tax.13Office of the Law Revision Counsel. 26 USC 541 – Imposition of Personal Holding Company Tax Distributing the income as dividends fixes it, since the income then gets taxed at the individual level instead. Small investment-heavy companies can trip the tests without realizing it.
Filing and Paying
Every C corporation files Form 1120 annually. For a calendar-year corporation, the return is due April 15 — the 15th day of the fourth month after the tax year closes.14Internal Revenue Service. 2025 Instructions for Form 1120 – U.S. Corporation Income Tax Return Filing Form 7004 buys an automatic six-month extension, pushing the deadline to October 15 for calendar-year filers.15Internal Revenue Service. Instructions for Form 7004 The extension covers the filing, not the payment. Tax owed is still due by the original deadline.
Corporations expecting to owe $500 or more at filing have to make quarterly estimated tax payments.16Internal Revenue Service. Estimated Taxes For calendar-year filers, installments are due April 15, June 15, September 15, and December 15. Missed or short payments trigger a penalty based on the shortfall, the length of the delay, and the quarterly underpayment interest rate the IRS publishes.17Internal Revenue Service. Underpayment of Estimated Tax by Corporations Penalty The penalty runs from each due date until the amount is paid, so catching up quickly limits the damage.
State Taxes Are a Separate Bill
Federal is only part of what a C corp owes. Most states impose their own corporate income tax, with rates ranging from zero in states without one to double digits in the highest-tax jurisdictions. A corporation owes state tax wherever it has nexus, established through physical presence like offices and employees or through economic activity like crossing a state’s sales threshold.
Some states use a franchise tax — a charge for the privilege of doing business in the state — instead of or on top of a corporate income tax. Others use a gross receipts tax that hits total revenue without the deductions an income tax allows. A corporation operating in more than one state has to track each state’s filing requirements independently, since apportionment rules and deadlines don’t always match the federal schedule.