How Your Corporation Will Be Taxed
In this guide, you'll learn about the main types of tax in Hawaii that apply to corporations, including sales, self-employment, corporate and federal taxes.
How your corporation is taxed will depend on whether it's an S Corp or a C Corp.
Hawaii State Tax
There are two types of Hawaii tax you must pay to the HI Department of Taxation and Finance: income and general excise. Depending on how your business is set up, you may also need to pay use tax.
Important: All of these taxes apply whether you have a C Corp or an S Corp.
Hawaii Income Tax
Anyone who takes earnings out of your corporation will need to pay HI income tax and will be taxed at the state's standard rates. Any employees will also need to pay state income tax. The current income tax brackets for Hawaii range from 1.4 percent to 11 percent depending on what your taxable income amount is.
You can use the tax tables provided by the Hawaii tax department to get an idea of how much you'll need to pay, but consult with your accountant or tax advisor to ensure you pay the proper amount.
Hawaii General Excise and Use Tax
These tax types are similar enough that they're often categorized together. It's still important to understand the differences between them.
Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the Hawaii Department of Taxation to find out whether your business is required to pay GET and ensure you remain in compliance.
Federal Taxes for Corporations
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Hawaii corporation is paying the correct amount, and that you're paying the correct individual amount.
Federal Taxes for C Corps
All shareholders who earn wages or a salary from a C Corporation must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On a salary of $43,000, you would pay self-employment tax of $6,579.
- On a salary of $63,000, you would pay self-employment tax of $9,639.
- On a salary of $83,000, you would pay self-employment tax of $12,699.
- On a salary of $103,000, you would pay self-employment tax of $15,759.
Federal Taxes for S Corps
The Internal Revenue Service may allow your business to be treated as an S Corporation for tax filing purposes, provided it meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary (on which you'll pay self-employment tax) and other income as distributions (which are not subject to self-employment tax).
Speak to your accountant or professional tax preparer for more information on reducing your tax burden through an S Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Unlike a limited liability company or an S Corporation, a C Corporation is required to file a corporate tax return and pay taxes on any profits.
When those profits are paid to shareholders as dividends, they will also be subject to taxation on the shareholders' personal tax returns.
This is often referred to as “double taxation,” and is one reason many business owners prefer to file their taxes as S Corporations.
Note: It is possible for a C Corp to file taxes as an S Corp. Consult with your accountant or professional tax advisor for more information.
A C Corporation may pay shareholders dividends as a share of the profits of the company. The value of dividends to which each shareholder is entitled depends on how many shares they own.
Dividends distributed to shareholders are taxed twice — first at the corporate level as profit (on the corporation’s Form 1120, the U.S. Corporation Income Tax Return) and again at the individual level as stock dividends (on the shareholder's Form 1040, the U.S. Individual Income Tax Return).
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
If you expect to owe $500 or more in income tax, you must make four quarterly estimated tax payments to the IRS. You'll estimate your total tax on Form 1120-W, then pay 25% on each due date. Please note that the IRS will no longer be updating Form 1120-W, so follow up with your accountant with any questions on estimated tax payments after 2023.
Important: This applies to you as the owner of the C Corporation, not the business itself. A C Corporation does not pay income tax.
It's a little less straightforward for an S Corp, which will pay estimated taxes by filing an IRS Form 1120-S, which is the income tax return form for S Corps.
Also, as the owner of an S Corp, you'll need to make estimated payments on self-employment tax.