The form of business you operate determines what taxes you must pay and how you must pay them. There are four general kinds of business taxes.
- Income tax
- Self-employment tax
- Employment tax
- Excise taxes
Income Tax
All businesses except partnerships and S-Corporations must file an annual income tax return. Partnerships and S-Corporations file information returns. We will discuss information returns later in this chapter.
The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If the type of income you receive does not have withholding, they you may be responsible for paying estimated taxes. The rules generally state that you must have pre-paid in 90% of the current year's tax liability or 110% of the previous year's tax liability or you will be assessed a penalty.
Estimated Tax. Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. These are generally due four times a year - April 15th, June 15th, September 15th, and January 15th of the following year.
Sole Proprietors, Partners, and S-Corporation Shareholders. You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
Corporations. You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. You must deposit the payments as explained later under Depositing Taxes.
Self-Employment Tax
Self-Employment tax (SE) is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payment of SE tax contributes to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare).
You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.
- Your net earnings from self-employment were $400 or more
- You had church employee income of $108.28 or more
The SSA time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income.