How to Calculate the Income Tax Payable for a Business

Corporations must file taxes each year.

Each year corporations must pay estimated taxes. During the year, the accountant will determine the estimated tax liability for the year and the company must then pay quarterly estimated taxes. To account for this, the corporation will first account for the taxes payable to show it has a liability. As the corporation pays cash for its taxes payable, the taxes payable moves to income tax expense for the year.

Things You'll Need

• Form 1120-W

Instructions

1. Use the smaller of the corporation's estimated income for the year or $50,000, then multiply it by 15 percent. Label this A. For example, a company has $1,000,000 of expected income for the year. Then $50,000 times 15 percent equals $7,500. This is labeled "A."

2. Subtract the estimated income for the year from the smaller of the estimated income for the year of $50,000, multiply the result by 25 percent. If the result is greater than $25,000, then multiply $25,000 by 25 percent instead. Label this "B." Subtract this amount from the difference used to multiply the amount. In our example, $1,000,000 minus $50,000 equals $950,000. Since $950,000 is greater than $25,000 use $25,000, so $25,000 times 25 percent equals $6,250. This becomes "B." Then, $950,000 minus $25,000 equals $925,000.

3. Use the smaller of the numbers calculated in Step 2 or $9,925,000 and multiply the amount by 34 percent. Label this "C." If the amount was greater than $9,925, then subtract the amount from the $9,925,000. Multiply the difference by 35 percent. Label this "D." In the example, $925,000 times 34 percent equals $314,500. This is "C." Because the amount is not greater then $9,925,000, the company does not have any tax at the 35 percent tax bracket. If the amount was greater than $9,925,000, for example, $10,000,000, then the company would multiply $9,925,000 by 34 percent, which equals $3,374,500. Then the company would subtract its remaining income from $9,925,000. In the example, $10,000,000 minus $9,925,000 equals $75,000. This amount is then multiplied by 35 percent, so $75,000 times 35 percent equals $26,250. This would be "D."

4. Multiply any amount of expected income over $100,000 by 5 percent, or use $11,750. Label this "E." Multiply any amount of expected income over $15,000,000 by 4 percent or use $100,000. Label this "F." In our example, $900,000 times 5 percent equals $45,000. The company will use $11,750 because the number is smaller. This is "E."

5. Add A, B, C, D, E, and F together. Add the alternative minimum tax, if any. This result is total tax. In our example, $7,500 plus $6,250 plus $314,500 plus $11,750 equals $340,000.

6. Subtract from the total tax any tax credits the company normally takes and add any additional taxes the company normally has. This is the amount of income tax payable a company will report on its balance sheet. As the company pays this amount, it will decrease the tax payable. In our example, the company normally has $40,000 in various tax credits. So, $340,000 minus $40,000 equals taxes payable of $300,000. Of the $300,000, $75,000 in estimated taxes are due each quarter, because $300,000 divided by 4 equals $75,000.

Tips & Warnings

• If these steps becoming confusing to keep track of, use Form 1120-W as a guide to make each calculation.

References

• IRS: Form 1120-W