The Federal Corporate Tax Rate Is 21 Percent
The federal corporate income tax rate in the United States is 21 percent. This is the tax that corporations pay on their profits to the federal government. The rate has been 21 percent since 2018, when Congress passed the Tax Cuts and Jobs Act. Before that year, the federal rate was 35 percent.
This 21 percent applies to the taxable income of C corporations — the standard business structure for large companies. The tax is calculated on what remains after a corporation deducts its business expenses, salaries, and other costs from its revenue. A corporation pays this tax once per year, usually based on quarterly estimated payments throughout the year.
The 21 percent federal rate is not the only tax a corporation pays. Most corporations also pay state corporate income taxes, which vary widely depending on where the business is located. Some states have no corporate income tax at all, while others tax corporate profits at rates between 4 and 12 percent. A few states have higher rates. The total tax burden on a corporation's profits is the combination of the federal 21 percent plus whatever state rate applies.
Key Takeaways
- The federal corporate tax rate is 21 percent on corporate profits, set by federal law since 2018.
- State corporate income tax rates vary by location, ranging from zero to over 12 percent in some states.
- The actual tax a corporation owes depends on its taxable income after deducting business expenses and other costs.
- Corporations may also owe taxes on dividends paid to shareholders and capital gains, depending on the structure of the business.
How the 21 Percent Rate Compares to Other Countries
The 21 percent federal rate is lower than it was before 2018, but it remains in the middle range compared to other developed nations. Canada's federal corporate tax rate is about 15 percent. The United Kingdom's is 25 percent as of 2023. France's is 25 percent. Germany's combined federal and trade tax rate is around 30 percent. Japan's is about 23 percent.
These comparisons can be misleading because countries calculate taxable income differently, offer different deductions, and have different rules about what counts as profit. A corporation operating in multiple countries may pay different effective rates depending on where its income is earned and how it structures its operations. The stated rate is not always the rate a specific company actually pays.
What Counts as Taxable Income for Corporations
A corporation does not pay the 21 percent tax on its total revenue. Instead, it pays tax on taxable income — the money left after subtracting allowable business expenses. These deductions include salaries and wages paid to employees, rent or mortgage on business property, cost of goods sold, utilities, equipment depreciation, and interest on business loans.
The rules for what can be deducted are set by the Internal Revenue Service and are detailed in the tax code. Some deductions are straightforward — the cost of materials used to make a product, for example. Others are more complex, such as depreciation schedules for equipment or rules about how much executives can be paid and still deduct the expense. A corporation's tax department or accountant determines which expenses may have access to and calculates the taxable income that the 21 percent rate applies to.
State Corporate Income Taxes Vary Widely
Nine states have no corporate income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (though New Hampshire taxes dividends and interest income). The remaining 41 states and Washington, D.C., all tax corporate profits, but the rates differ significantly.
Some states with lower rates include Colorado at 4.63 percent, Indiana at 5.25 percent, and Louisiana at 4 percent (though Louisiana's rate varies by business type). States with higher rates include Iowa at 9.9 percent, New Jersey at 11.5 percent, and Pennsylvania at 9.99 percent. A few states have graduated rates that increase as income rises, similar to individual income tax brackets. The state rate applies to income earned within that state, so a corporation doing business in multiple states may owe different state tax rates on different portions of its income.
How Corporations Actually Calculate What They Owe
A corporation's tax department starts with total revenue for the year, then subtracts all allowable business expenses to arrive at taxable income. They multiply that taxable income by 21 percent to get the federal tax owed. Then they repeat the process for each state where the corporation does business, using that state's tax rate and rules about what expenses can be deducted.
Corporations file a federal return (Form 1120) with the IRS and state returns with each state's tax authority. The process involves detailed record-keeping and often requires the work of accountants or tax professionals, especially for large corporations with operations in many states or countries. Corporations make estimated tax payments throughout the year based on expected profits, then file the final return and pay any remaining balance or claim a refund if they overpaid.
Special Taxes and Additional Levies on Corporate Income
Beyond the standard corporate income tax, corporations may owe other federal taxes. If a corporation pays dividends to its shareholders, those shareholders owe individual income tax on the dividends they receive — a situation sometimes called "double taxation" because the corporation paid tax on the profit and the shareholder pays tax again on the distribution. The shareholder's tax rate depends on their individual tax bracket and whether the dividends are may have access to or ordinary.
Corporations that sell assets at a profit may owe capital gains tax. Some industries face specific taxes — for example, banks pay a tax on their net income, and insurance companies have their own tax rules. A few states also impose gross receipts taxes or franchise taxes on corporations in addition to income tax. The total tax burden on a corporation depends on its structure, where it operates, what it does, and how it distributes profits to owners.
Frequently Asked Questions
Did the corporate tax rate change recently?
The federal rate has been 21 percent since January 2018. Before that, it was 35 percent. The change came from the Tax Cuts and Jobs Act passed by Congress in December 2017. No change to the 21 percent rate has been enacted since then, though proposals to raise or lower it appear regularly in Congress.
Is the 21 percent rate the same for all types of businesses?
The 21 percent federal rate applies to C corporations. Other business structures — sole proprietorships, partnerships, S corporations, and LLCs — are taxed differently. Their owners report business income on their personal tax returns and pay individual income tax rates instead. The structure a business chooses affects how much tax it owes.
Why do some corporations pay less than 21 percent in federal tax?
A corporation's actual tax rate depends on its taxable income after deductions, not just the stated 21 percent rate. A corporation with large deductions, losses carried forward from previous years, or tax credits may owe less than 21 percent of its total revenue. Some industries also have special tax rules or credits that lower their effective rate.
Do small businesses pay the same 21 percent corporate tax rate?
The 21 percent rate applies to all C corporations regardless of size. However, most small businesses are not structured as C corporations. They are sole proprietorships, partnerships, or S corporations, which means the owners pay individual income tax on business profits instead of a separate corporate tax. The choice of business structure affects the tax rate that applies.
How does a corporation know which state tax rate to use?
A corporation owes state tax in each state where it has a physical presence or does business. The rules for what counts as "doing business" vary by state but typically include having an office, employees, or significant sales in that state. A corporation calculates income attributable to each state and applies that state's tax rate to that portion of income. Multistate corporations often use accountants to determine how to allocate income across states.