Business Taxes

The short version

If you own a business, you generally must pay taxes on the income your business earns. The way your business is set up (like a sole proprietorship, partnership, corporation, or S corporation) affects how you calculate and pay these taxes. Understanding these rules helps you meet your legal obligations and avoid penalties, ensuring your business stays compliant with federal tax law.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

26 U.S.C. § 11
This section imposes a tax on the taxable income of every corporation.
Why it matters: If your business is structured as a regular corporation (C corporation), this is the main law that requires it to pay federal income tax on its profits.
26 U.S.C. § 1361(a)
This section defines an 'S corporation' as a small business corporation for which an election under section 1362(a) is in effect.
Why it matters: This rule creates a special type of corporation (S corp) that avoids double taxation by passing its income directly to the owners, who then pay individual income tax on it.
26 U.S.C. § 1362(a)
This section states that a small business corporation may elect to be an S corporation by filing an election with the Internal Revenue Service.
Why it matters: This explains how a qualifying business can choose to be taxed as an S corporation, which has different tax benefits and requirements than a regular corporation.
26 U.S.C. § 1363(a)
This section specifies that an S corporation shall not be subject to the taxes imposed by this chapter (Chapter 1, Normal Taxes and Surtaxes).
Why it matters: This is a key benefit of an S corporation: the business itself generally doesn't pay federal income tax; instead, the owners report the income on their personal tax returns.

Words you need to know

Taxable Income: This is the amount of your business's income that is subject to tax, calculated after subtracting allowable deductions and expenses.
C Corporation: A business entity taxed separately from its owners under 26 U.S.C. § 11. It pays corporate income tax, and then shareholders pay tax again on dividends they receive.
S Corporation: A 'small business corporation' (as defined in 26 U.S.C. § 1361) that elects a special tax status under 26 U.S.C. § 1362, avoiding corporate-level income tax.
Pass-Through Entity: A business structure (like a sole proprietorship, partnership, or S corporation) where income and losses are 'passed through' directly to the owners' personal income tax returns.
Estimated Taxes: Payments you make throughout the year to cover your income tax, including self-employment tax, if you expect to owe tax of $1,000 or more.
Deductions: Business expenses that you can subtract from your gross income to reduce your taxable income. Examples include rent, supplies, and employee wages.

Your rights

✓You have the right to choose the legal structure for your business that best suits your needs, such as a C corporation, S corporation, or sole proprietorship.
✓You have the right to claim all eligible business deductions to reduce your taxable income.
✓You have the right to receive clear notice from the IRS if there's an issue with your tax filings or payments.
✓You have the right to appeal an IRS decision if you disagree with it.
✓You have the right to amend your tax return if you discover an error after filing.

How the process actually works

1
Choose business structure
When you first start your business
Before you start earning income, you decide how your business will be legally formed (e.g., sole proprietorship, partnership, LLC, C corp, S corp). This choice significantly impacts how your business is taxed.
2
Understand tax obligations
Ongoing, as your business operates
Based on your business structure, you'll learn whether your business income is taxed at the corporate level (26 U.S.C. § 11 for C Corps) or passes through to your personal return (e.g., S Corps under 26 U.S.C. § 1363(a)). You'll also determine if you need to pay self-employment taxes.
3
Track income and expenses
Continuously throughout the tax year
Keep meticulous records of all money your business earns and all money it spends. This is crucial for calculating your taxable income and identifying eligible deductions.
4
Pay estimated taxes
Generally April 15, June 15, September 15, and January 15 of the following year
If you expect to owe at least $1,000 in tax for the year, you must pay estimated taxes in quarterly installments. This prevents a large tax bill at year-end and potential penalties.
5
File annual tax returns
Annually, by the due date specific to your business type
Depending on your business structure, you will file specific forms (e.g., Schedule C for sole proprietors, Form 1120 for C corporations, Form 1120-S for S corporations). These forms report your business's income, deductions, and tax due.

Deadlines that can end your case

Individual/Pass-Through Business Tax Filing
April 15 (for sole proprietors, partners, S corp owners)
An extension can be filed to extend the filing deadline, but not the payment deadline. Penalties apply for late filing or late payment.
C Corporation Tax Filing (Form 1120)
Generally the 15th day of the 4th month after the end of the tax year (e.g., April 15 for calendar year filers)
Penalties apply for late filing or late payment. Extensions are available for filing, but not payment.
Estimated Tax Payments
April 15, June 15, September 15, January 15 (of next year)
Failure to pay enough estimated tax throughout the year can result in penalties, even if you receive a refund when you file your return.
S Corporation Election (Form 2553)
Generally, by the 15th day of the 3rd month of the tax year the election is to take effect, or at any time during the preceding tax year (26 U.S.C. § 1362(b))
Missing this deadline means your business will be taxed as a C corporation for that year, unless you qualify for late election relief.

Costly mistakes

✕Not tracking income and expenses accurately, leading to incorrect tax calculations or missed deductions.
✕Failing to pay estimated taxes quarterly, resulting in underpayment penalties at year-end.
✕Not understanding the tax implications of your business structure (e.g., treating an S corp like a C corp, or vice-versa).
✕Mixing personal and business finances, making it difficult to separate deductible business expenses from personal expenses.
✕Missing the deadline to elect S corporation status (under 26 U.S.C. § 1362), causing the business to be taxed as a C corporation for the year.
✕Claiming personal expenses as business deductions without proper justification.

Your checklist

Determine your business's legal structure (e.g., sole proprietorship, C corp, S corp).
Obtain an Employer Identification Number (EIN) if required (e.g., for corporations, partnerships, or if you have employees).
Set up a system for tracking all business income and expenses.
Consult IRS Publication 505 (Tax Withholding and Estimated Tax) to understand estimated tax requirements.
Make quarterly estimated tax payments if your business expects to owe tax.
Identify all eligible business deductions to reduce your taxable income.
Keep all tax-related records for at least three years (or longer for certain assets).
File the correct annual federal tax forms for your business type by the deadline.

Common questions

What is the difference between a C corp and an S corp for tax purposes?

A C corporation (under 26 U.S.C. § 11) pays income tax on its profits at the corporate level. If it then distributes profits to shareholders, those shareholders pay tax again on the dividends. An S corporation (elected under 26 U.S.C. § 1362) generally avoids corporate-level income tax (26 U.S.C. § 1363(a)); instead, profits and losses are passed through to the owners' personal tax returns and taxed once.

Do I have to pay self-employment tax if I own a business?

If you are a sole proprietor or a general partner, you generally must pay self-employment taxes (Social Security and Medicare) on your net earnings from self-employment. S corporation owners typically do not pay self-employment tax on their pass-through income but must pay themselves a reasonable salary subject to FICA taxes.

What records should I keep for business taxes?

You should keep records of all gross receipts, purchases, expenses, and asset information. This includes bank statements, receipts, invoices, mileage logs, and payroll records. Good record-keeping supports the income and deductions reported on your tax return.

Can I change my business's tax structure?

Yes, you can change your business's tax structure. For example, an LLC can elect to be taxed as an S corporation by filing Form 2553 with the IRS (26 U.S.C. § 1362). There are specific rules and deadlines for these changes, and they often have significant tax implications.

How this changes by state

Tax rules for businesses vary significantly from state to state. While federal law (like 26 U.S.C. §§ 11, 1361–1379) governs income tax at the national level, most states also impose their own income taxes, sales taxes, property taxes, unemployment taxes, and other specific business taxes. Some states follow federal classifications for C corps and S corps, while others have their own definitions or tax rules. To find your state's specific rules, visit your state's Department of Revenue or taxation website, or consult a local tax professional.

When you need a lawyer

You should consider consulting a tax lawyer or qualified tax professional when choosing a business structure, especially if your business is complex or involves multiple owners. You also need professional help if you receive an audit notice from the IRS or state tax authorities, if you face significant tax debt, or if you plan a major business transaction like selling your company, as these situations often involve intricate tax laws and potential disputes.

Do this today

→Confirm your current business structure and how it's taxed (e.g., sole proprietorship, C corp, S corp).
→Review your record-keeping system for income and expenses to ensure it's accurate and complete.
→Calculate if you need to pay estimated taxes and set reminders for quarterly payments.
→Gather all necessary financial documents in preparation for your annual tax filing.

This lesson is legal information for educational purposes only, based on 26 U.S.C. §§ 11, 1361–1379. It is not legal advice and does not create an attorney-client relationship.