# How each entity is taxed

> Schedule C, Form 1065, Form 1120-S and Form 1120 — and Northwind's illustrative year taxed twice as a C corporation (32.85%) or once as a partnership.

Source: https://lopifi.com/learn/how-business-entities-are-taxed
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

---

**How are LLCs, S corps and C corps taxed differently?** Schedule C, Form 1065, Form 1120-S and Form 1120 — and Northwind's illustrative year taxed twice as a C corporation (32.85%) or once as a partnership.

The entity decides which return the business files, and whether its profit is taxed once or twice. There are four federal returns to know.

| Taxed as | Business files | Owners receive | Who pays the income tax |
| --- | --- | --- | --- |
| Sole proprietor / disregarded LLC | Nothing separate — Schedule C on the owner's return | — | The owner |
| Partnership (incl. multi-member LLC) | Form 1065, by March 15 for a calendar year | [Schedule K-1](https://lopifi.com/md/glossary/schedule-k-1) | Each partner, on their share |
| S corporation | Form 1120-S, by March 15 for a calendar year | Schedule K-1 | Each shareholder, on their share |
| C corporation | [Form 1120](https://lopifi.com/md/glossary/form-1120), by April 15 for a calendar year | Form 1099-DIV for dividends | The corporation at 21%, then shareholders on dividends |

Who files what, and who pays.

> “Generally, a domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended as shown at the top of Form 1065. For calendar-year partnerships, the due date is March 15.”

— [Instructions for Form 1065 (2025), When To File](https://www.irs.gov/instructions/i1065), Form 1065 — who files and when

> “Generally, an S corporation must file Form 1120-S by the 15 day of the 3rd month after the end of its tax year.”

— [Instructions for Form 1120-S (2025), When To File](https://www.irs.gov/instructions/i1120s), Form 1120-S — who files and when

## Twice, or once

A [C corporation](https://lopifi.com/md/glossary/c-corporation) pays 21% on its taxable income. When it pays a dividend out of what's left, the shareholders are taxed again, and the corporation gets no deduction. Qualified dividends are taxed at the capital gain rates, 0%, 15% or 20%, and higher-income owners can owe the 3.8% net investment income tax on top (over $250,000 of income on a joint return, $200,000 for most others).

> “The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.”

— [IRS, Forming a corporation](https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation), Corporations — the double tax

> “For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.”

— [26 U.S.C. §1(h)(1), (h)(11)(A)](https://www.law.cornell.edu/uscode/text/26/1), Qualified dividends are taxed at the capital gain rates: 0%, 15% or 20%

| C corporation | Amount |
| --- | --- |
| Taxable income | $20,968.80 |
| Corporate tax at 21% | $4,403.45 |
| Left to pay out | $16,565.35 |
| Founders' tax on the dividend at 15% | $2,484.80 |
| Reaches the founders | $14,080.55 |
| Both taxes | $6,888.25 (32.85%) |

Northwind's illustrative year — twelve Septembers of book profit, as the compliance track uses it — all paid out at a 15% dividend rate.

A [pass-through](https://lopifi.com/md/glossary/pass-through-entity) skips the first layer. If Northwind were an LLC taxed as a partnership, the same $20,968.80 would land on two K-1s of $10,484.40. No entity tax — but each founder owes income tax on that share at their own rates whether or not the cash is paid out, and, as an active member, [self-employment tax](https://lopifi.com/md/glossary/self-employment-tax) of $1,481.40.

**Wrong:** Pass-through always beats a C corporation because there's only one tax.

**Right:** C corp: 21% now; the second layer only on what's paid out.
Pass-through: owners' rates on all of it, every year, cash or not.

Pass-through isn't automatically cheaper. A C corporation that keeps its profit to grow pays only the first layer, and its owners' second layer may never come — or come at a low rate on a sale of qualified small business stock. A pass-through's owners pay every year, on income they may not have received.

**Exercise — The same profit, taxed two ways.** Northwind's illustrative year: 20,968.80 of taxable profit, two founders, half each. Work out each line. Leave the owners' ordinary income tax out — it applies in both cases, at their own rates. Type it in the workbook at https://lopifi.com/playground.

## Northwind's dividend, from the founders' side

JE-14 declared a $500 dividend, $250 to each founder. Each is over the $10 threshold, so Northwind sends each founder a Form 1099-DIV for the year they're paid, and each reports it on their own return.

> “File Form 1099-DIV for each person: To whom you have paid dividends (including capital gain dividends and exempt-interest dividends) and other distributions valued at $10 or more in money or other property,”

— [Instructions for Forms 1099-DIV, Specific Instructions](https://www.irs.gov/instructions/i1099div), Form 1099-DIV for each shareholder paid $10 or more

*[Figure: quarterly estimates]*

Owners of pass-throughs pay their own tax in quarterly estimates; a C corporation pays its own. Illustrative figures.

> **A C corporation's profit is taxed when earned and again when paid out; a pass-through's is taxed once, to the owners, as earned.**

In this lesson: [self-employment tax](https://lopifi.com/md/learn/how-business-entities-are-taxed/self-employment-tax) worked on Schedule SE, the [§199A deduction](https://lopifi.com/md/learn/how-business-entities-are-taxed/qbi-deduction) after the 2025 law, and [the taxes states put on the entity itself](https://lopifi.com/md/learn/how-business-entities-are-taxed/state-entity-taxes).

## Pages in this lesson

- [Self-employment tax](https://lopifi.com/md/learn/how-business-entities-are-taxed/self-employment-tax) — 4 min. How is self-employment tax calculated?
- [The QBI deduction (§199A)](https://lopifi.com/md/learn/how-business-entities-are-taxed/qbi-deduction) — 3 min. What is the Section 199A QBI deduction, and is it still available?
- [State taxes on the entity](https://lopifi.com/md/learn/how-business-entities-are-taxed/state-entity-taxes) — 3 min. Do states tax LLCs and pass-through entities?

## Where this lesson's rules come from

- [Instructions for Form 1065 (2025), When To File](https://www.irs.gov/instructions/i1065) — Form 1065 — who files and when (irs)
- [Instructions for Form 1120-S (2025), When To File](https://www.irs.gov/instructions/i1120s) — Form 1120-S — who files and when (irs)
- [IRS, Forming a corporation](https://www.irs.gov/businesses/small-businesses-self-employed/forming-a-corporation) — Corporations — the double tax (irs)
- [26 U.S.C. §1(h)(1), (h)(11)(A)](https://www.law.cornell.edu/uscode/text/26/1) — Qualified dividends are taxed at the capital gain rates: 0%, 15% or 20% (statute)
- [26 U.S.C. §1411(a)(1), (b)](https://www.law.cornell.edu/uscode/text/26/1411) — Net investment income tax: 3.8%, over $250,000 joint or $200,000 for most others (statute)
- [Instructions for Forms 1099-DIV, Specific Instructions](https://www.irs.gov/instructions/i1099div) — Form 1099-DIV for each shareholder paid $10 or more (irs)
- [26 U.S.C. §11(b)](https://www.law.cornell.edu/uscode/text/26/11) — Tax imposed on corporations (statute)
- [Form 1065 (2025)](https://www.irs.gov/pub/irs-pdf/f1065.pdf) (PDF) — Form 1065, U.S. Return of Partnership Income (PDF) (form)
- [Form 1120-S (2025)](https://www.irs.gov/pub/irs-pdf/f1120s.pdf) (PDF) — Form 1120-S, U.S. Income Tax Return for an S Corporation (PDF) (form)
- [Form 1120](https://www.irs.gov/pub/irs-pdf/f1120.pdf) (PDF) — U.S. Corporation Income Tax Return (PDF) (form)
- [Wikipedia, “Double taxation”](https://en.wikipedia.org/wiki/Double_taxation) — Double taxation (reference)

## Read further

- https://lopifi.com/md/journal-entries/dividends
- https://lopifi.com/md/journal-entries/owners-draw
- https://lopifi.com/md/journal-entries/income-tax-provision
- https://lopifi.com/md/startups/startup-tax-deadlines-by-month
- https://lopifi.com/md/startups/form-1120-what-to-give-your-tax-preparer
- https://lopifi.com/md/accounting/form-1120
- https://lopifi.com/md/accounting/qsbs

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Lesson:** Lesson 2 of 9 — 10 min
- **Terms taught:** [Double taxation](https://lopifi.com/md/glossary/double-taxation), [Pass-through entity](https://lopifi.com/md/glossary/pass-through-entity), [Schedule K-1](https://lopifi.com/md/glossary/schedule-k-1), [Self-employment tax](https://lopifi.com/md/glossary/self-employment-tax), [C corporation](https://lopifi.com/md/glossary/c-corporation), [Dividend](https://lopifi.com/md/glossary/dividend)
- **Previous:** [Nonprofit 501(c)(3), Entities · Lesson 1](https://lopifi.com/md/learn/business-entity-types-explained/nonprofit-501c3)
- **Next:** [Self-employment tax](https://lopifi.com/md/learn/how-business-entities-are-taxed/self-employment-tax)
- **The course:** https://lopifi.com/md/learn