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Effective Corporate Tax Rate Calculator

Effective Corporate Tax Rate Calculator can help you determine your company's effective tax rate with just a few clicks. Simply enter your company's financial information and our calculator will do the rest.

Understanding Effective Corporate Tax Rate

What is an effective corporate tax rate?

The effective corporate tax rate is a financial ratio that measures the corporate income tax in regards to the entity’s taxable income. It answers the question, “what percentage of its taxable income is paid out in taxes?” Taxable income refers to a business’s earnings after accounting for depreciation, corporate giving, and other tax-reducing efforts.

Finally, the effective corporate tax rate typically accounts for only federal income taxes — not state and local taxes, property taxes, or sales tax.

What is the Effective Corporate Tax Rate formula?

The effective corporate tax rate formula looks like this:

effective corporate tax rate = income tax paid / EBT

Income tax paid refers the actual amount of tax paid to the government for the tax year. EBT stands for earnings before tax, but after subtracting operating expenses, interest, and the cost of goods sold (COGS). EBT is almost always present on the income statement.

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How do you calculate the effective corporate tax rate?

You can use the calculator on this page to quickly calculate the effective corporate tax rate of a business. There are three simple steps.

Find the EBT listed on the income statement.
Find the total tax expense listed above net income on the income statement.
Plug these figures into the effective corporate tax rate calculator or formula and calculate.
Multiply the decimal by 100 to get a percentage.

Let’s do an example calculation together.

Effective corporate tax rate example

You gather the income statement from Silo Solar, a solar installation company that services farmers. On the statement you find that the company’s earnings before tax is listed as $920,000 and it’s income tax paid is listed as $170,500.

Plugging these figures into our formula, we get an effective corporate tax rate of 0.185.

0.185 = $170,500 / $920,000

Now we can multiply that decimal by 100 to turn it into a percentage.

18.5% = 0.185 x 100

There we have it. Silo Solar pays an effective corporate tax rate of just 18.5 percent.

Why is it important to look at a business’s effective corporate tax rate?

Reviewing the tax rate a company actually pays can provide you with great insight into the entities ability to create and use tax-advantaged strategies. Though the corporate tax rate in the United States is 21 percent, most businesses pay less.

Investors and business owners want to ensure an entity employs smart strategies to lower its tax liability. But they also want to ensure a business isn’t engaging in shady tax practices, which can indicate future liabilities in the form of back taxes or litigation.

Beyond a metric of tax efficiency, the effective corporate tax rate a business pays gives insight into future tax burdens.

How do you lower your effective corporate tax rate?

Businesses can use several strategies to lower their bill from the IRS. Here are our favorites.

Contribute to retirement funds. Small business owners can contribute up to $57,000 a year and reduce taxable income. They can also contribute to employee retirement accounts.
Use health insurance deductibles. Health savings accounts (HSAs) are excellent places to store tax-free monies that can be used for health and wellness spending.
Deduct everything you’re allowed to deduct. Review your finances with a fine-toothed comb to ensure you’re getting all the tax deductions you’re entitled to.
Deduct everything in the best way possible. There are different methods for tax deductions. For example, you can deduct the cost of equipment over time or all at once. Compare your options and choose the best one.
Hire 1099 contractors when possible. Independent contractors cost less in taxes and other costs. For example, you won’t be responsible for their healthcare costs, sick days, or employment taxes.
Become an LLC: A limited liability company (LLC) offers members (aka owners) the advantage of liability protections and lowered tax burdens. Members of an LLC can choose to pay taxes like a sole proprietor (as a share of their personal income at their personal income tax rate.) Corporations pay a corporate income tax, and its shareholders pay a personal tax on capital gains from dividends.
Make charitable contributions. This is an excellent way for your business to live its values while reducing taxable income. Make the most of this one by working it into your marketing campaigns and ensuring your customers know what you stand for.
Work with a tax professional. Find an excellent certified public accountant (CPA) and stick with their advice. The best can help you strategize for greater tax savings for years to come.

Whatever strategies you use, ensure you follow the rules. Saving on taxes now doesn’t mean much if you get audited and have to pay additional taxes and fines in the future.

What is the difference between minimum corporate tax rate and maximum corporate tax rate?

Back just a handful of years ago when the U.S. used a progressive corporate tax system, there was a minimum and maximum corporate tax rate. The minimum rate was paid on earnings below a certain threshold. The rate gradually increased along with taxable income. The maximum rate was the highest amount (35 percent before 2018) a business entity could pay.

Minimum and maximum corporate tax rates no longer apply to U.S. federal taxes. But they do apply to state and local tax systems. And they can also apply to companies that hold earnings overseas.

What’s the difference between marginal tax rate and effective tax rate?

The marginal tax rate refers to the tax rate an entity pays on its final dollar(s) of taxable income. The U.S. uses a progressive tax system for individuals, where different tax rates apply to different tax brackets. Sole proprietors pay a marginal tax rate, and they have to pay self-employment tax.

Corporations used to have a progressive tax system as well, but switched to a flat 21 percent corporate tax rate in 2018 following the passage of the 2017 Tax Cuts and Jobs Act. Even so, many states use a progressive corporate tax system.

The effective corporate tax rate accounts for the tax rate paid after accounting for deductible expenses.

The information provided by the Effective Corporate Tax Rate calculator provides general information. It is not a substitute for the advice of an accountant or other tax and accounting professional. The calculator may not account for every circumstance that applies to you or your business. Gusto (“Gusto”) does not warrant, promise or guarantee the information in the calculator is accurate or complete, and Gusto expressly disclaims all liability, loss, or risk incurred as a direct or indirect consequence of its use. By using the calculator, you waive any rights or claims you may have against Gusto in connection with its use.

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