How Does a Withholding Income Tax Affect Businesses?

Just like an individual taxpayer, a business can use withholding income tax options to pay throughout the year instead of waiting until April to file a tax return. In fact, businesses are required to make at least quarterly contributions to the IRS for income earned in a given period of time. Depending on how your business operates, you will have two primary options for withholding tax.

Incorporated Business Taxes

As the owner of an incorporated business, you are paid with income from the business. Your income is reported on a traditional W2. This means withholding can be taken out voluntarily on your paycheck. At the end of the year, you will use your W2 to file the same as any other employee at your business. Your business income will also be reported, and its tax liability will be separately determined.

Unincorporated Business Taxes

If you are an independent contractor, you do not get paid from your business. Instead, all income that flows in is income direct to you. In this case, you will need to track the income quarterly and make an estimated payment. If you fail to make periodic payments, you may see a penalty at the end of the year. Come April, you will only need to file for yourself in order to cover all tax liabilities.