A C corporation is the default federal tax classification for a corporation: a fully separate taxpayer that files Form 1120 and pays tax on its own profits at a flat 21% rate under IRC Section 11. Nothing flows through to the owners' personal returns until the corporation actually pays them, whether as salary or as dividends. It is the structure of venture-backed startups and public companies, occasionally the right answer for a profitable private business, and usually the wrong one for a self-employed person living on the profits.
Two layers of tax and how money comes out
The corporation pays 21% on taxable income reported on Form 1120. When after-tax profit is then distributed, shareholders pay a second tax on the dividend: qualified dividends are taxed at 0%, 15%, or 20%, plus the 3.8% net investment income tax for higher earners. Fully distributing profit therefore costs up to roughly 39.8% in combined federal tax: 21% at the entity, then up to 23.8% on the 79% that remains. A pass-through owner tops out at 37%, and often at an effective 29.6% after the 20% QBI deduction, which C corporation income never gets.
Owners who work in the business take W-2 salary, which the corporation deducts and which carries normal payroll tax. Losses stay locked inside the corporation as net operating losses; shareholders cannot deduct them personally, unlike S corporation or partnership losses. Two guardrails discourage using the entity as a piggy bank: the accumulated earnings tax, a 20% surtax on earnings retained beyond reasonable business needs above a $250,000 cushion ($150,000 for certain service corporations), and the personal holding company tax, another 20% aimed at undistributed passive-type income in closely held corporations.
2026 figures
The 21% rate is permanent under current law, with no scheduled change for 2026. The 0%, 15%, and 20% qualified dividend breakpoints are indexed annually; the 3.8% net investment income tax thresholds of $200,000 (single) and $250,000 (married filing jointly) are fixed and not indexed. A calendar-year 2026 Form 1120 is due April 15, 2027, extendable six months with Form 7004; corporate estimated taxes are paid through EFTPS in four installments due the 15th day of the 4th, 6th, 9th, and 12th months of the tax year, so April 15, June 15, September 15, and December 15, 2026 for a calendar-year corporation.
For qualified small business stock under Section 1202, the 2025 legislation reshaped the exit math for stock issued after July 4, 2025: the gain exclusion phases in at 50% after three years, 75% after four, and 100% after five, the per-issuer exclusion cap rose to $15,000,000, and the qualifying gross asset ceiling rose to $75,000,000. Stock issued before that date keeps the prior rules, generally a 100% exclusion after five years with a $10,000,000 cap.
For creators and the self-employed
A C corporation earns its keep in a few specific situations. Raising venture capital is the big one: institutional investors expect a C corporation, usually in Delaware, and convert anything else before funding. Building toward a QSBS exit is the second, since only C corporation stock qualifies for the Section 1202 exclusion. The others: reinvesting essentially all profit at the 21% rate for years, offering the widest menu of deductible fringe benefits, and accommodating foreign shareholders or multiple stock classes, neither of which an S corporation allows.
For a typical creator, coaching, or consulting business that pays its profit out to the owner to live on, the C corporation is usually a tax mistake: two layers of tax against the pass-through's one layer plus QBI. The plumbing is flexible in both directions, though. An LLC can elect C corporation taxation on Form 8832, and a corporation can elect S status on Form 2553 to get pass-through treatment while keeping the corporate legal shell. Day to day, a C corporation owner has no Schedule C and no Schedule SE: compensation arrives on a W-2 through real payroll (Form 941 filings and all), and dividends arrive on a 1099-DIV.
Mistakes that cost money
First, choosing the C corporation for the "low 21% rate" while distributing everything. The relevant comparison is 39.8% combined against roughly 29.6% for a pass-through with the QBI deduction; on $300,000 of distributed profit that is around $30,000 a year of extra federal tax. Second, trapping appreciating assets inside. Real estate or a valuable brand held in a C corporation faces double tax on the way out, at the corporate level on sale and again on the liquidating distribution, and there is no cheap escape later. Third, disguised dividends. Personal expenses run through the company, or salary an examiner finds excessive, get reclassified: the corporation loses the deduction and the shareholder is taxed anyway, the double tax with none of the planning. Fourth, missing the S election window. Form 2553 is due two months and 15 days into the year it should take effect, and a missed deadline means a full year of C corporation tax unless late-election relief applies. Fifth, hoarding passive cash. Years of retained earnings sitting in treasuries with no documented business plan invite the accumulated earnings tax at 20% on top of everything else.
State treatment
States add their own corporate income or franchise taxes on top of the federal 21%, at rates from zero to roughly 10% depending on the state, and then most states tax the dividends on the shareholder's personal return as well. A C corporation operating in several states apportions its income among them and files corporate returns in each, a compliance layer pass-through owners largely avoid. State tax alone can move the entity-choice math by several points and belongs in any model before the election is made.
Entity choice is one of the few decisions that touches every future year's tax bill and is expensive to reverse, so run the numbers with a professional before forming a C corporation or electing into one, and revisit the choice whenever the business starts retaining serious capital or courting investors.