Taxes
Income Taxes

Income Taxes

If your business is incorporated, you may elect to become an "S" corporation (formerly known as Sub-Chapter S) for federal income tax purposes. As an S corporation, your company will not pay direct taxes in most cases. Instead, income and losses are passed on to stockholders. Therefore, the individual stockholders pay the income tax.

Some states treat S corporations in the same manner as does the federal government, and taxes the stockholders. Other states do not recognize S corporation status, and tax the corporation directly.

Remember that the federal corporation tax returns (regardless of S corporation election) are due one month earlier than individuals' on the fifteenth day of the third month after the end of the company's year. For example, if your fiscal year ends on December 31, your filing date is March 15. The payment for a corporation with an S election is still part of the individual return due on April 15. Be sure to check the section on estimated taxes to know when estimated tax payments are due.

If your business is a sole proprietorship or a partnership, the income is taxed directly to the owner or partners for federal income tax purposes. Most states follow the same rule. However, a few jurisdictions tax the business entity directly. Check with your tax consultant for the rules and regulations that apply to your business.

Remember, you need to file tax returns, and pay a minimum tax in some areas, even if your business has yet to earn a profit.

Estimated income taxes
At the beginning of your second year in business, you may be in for a little surprise. Not only do federal, and in some localities state and local, tax authorities require payment of income taxes on the first year's earnings, but they want you to start paying taxes on next year's earnings. Yes, before the year has ended!

Estimated federal corporation taxes are due when the annual tax is expected to be at least $500. Payments of 25 percent each are due on the fifteenth day of the fourth, sixth, ninth, and twelfth months of your fiscal year. If you are on a calendar fiscal year, for instance, estimated payments are due on April 15, June 15, September 15, and December 15. Each state has its own minimums and payment schedules, often varying from the federal ones.

If you are self-employed or in a partnership, you also will have to pay income tax estimates. They need to be figured into the total estimated tax the individual owes.