Why do some businesses have different tax years?
• What kind of payroll taxes am I liable for as an employer? • Can I avoid payroll taxes by hiring independent contractors rather than employees? • What are the tax consequences of buying or selling a business? Q: How are businesses taxed? A: When people think of taxes paid by businesses, income taxes are probably what come to mind first. But income taxes are only one of many different kinds of taxes assessed against businesses by federal, state and local governments. Oftentimes, a tax on a business is called something else like “license fee” or an “assessment,” but any payment to the government is essentially a tax. In the United States, all businesses are subject to federal taxation on their income. But they”re also subject to taxation by state and local governments, each one of which has different rules and regulations: • At the local level, most businesses are required to obtain a business license, which is a form of tax. There are also registration fees, fees for permits and local
Most businesses now operate for tax purposes on a calendar year, which means that their tax reporting periods end on December 31st of each year (except in certain instances such as when going out of business or selling a business). Sole proprietorships and partnerships must use the calendar year for tax purposes. But most incorporated businesses can choose their own fiscal year, meaning that the end of the business’s annual tax reporting period could be on any day of the year, typically at the end of a month. (There are some limitations such as with respect to professional service corporations such as for lawyers or doctors, who must report on calendar years. Limited liability companies and “S” corporations must also use a calendar year because, by definition, they are treated as partnerships for tax purposes.) One reason a company would want to have a fiscal year for tax reporting purposes is to conform to the tax reporting requirements with the business cycle. For example, if the bus
