Considering Estimated Tax Payments When Choosing a Business Type

Estimated Tax Payments

Sole Proprietorship

The sole proprietor generally will be required to make federal and Minnesota estimated tax payments if his or her income tax and (for federal purposes) self employment tax will exceed taxes paid through withholding and credits by $1,000 or more. The tax is determined on income from all sources, including income from the business. A penalty may be imposed on underpaid estimates.

Partnership

The partnership itself is not required to make estimated tax payments. However, for Minnesota tax purposes, a partnership is required to pay quarterly estimated tax if its Minnesota minimum fee is $500 or more or if it has a nonresident partner whose share of the composite income tax is $500 or more. As with the sole proprietorship, individual partners generally will be required to make estimated tax payments if their income tax and self employment tax will exceed taxes paid through withholding and credits by $1,000 or more. The tax is based on taxable income from all sources, not just the income from the partnership. If the tax is underpaid, a penalty may be imposed on the partner. As with the sole proprietorship, both federal and Minnesota estimates generally will be required.

C Corporation

Federal

A C corporation whose estimated tax is expected to be $500 or more is required to make estimated tax payments. If the corporation does not use Electronic Federal Tax Payment System (EFTPS), deposit corporation income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. Mail or deliver the completed Form 8109 with the payment to an authorized depository (that is, a commercial bank or other financial institution authorized to accept federal tax deposits).

Minnesota

A corporation with an estimated tax of $500 or more must make Minnesota quarterly estimated tax payments. In addition, a C corporation with more than $20,000 in tax liability must make all its tax payments via electronic funds transfer. These payments are filed with the Minnesota Department of Revenue. For both federal and
Minnesota purposes, a penalty may be imposed for failure to pay the correct estimated tax on or before its due date.

S Corporation

The S corporation is not subject to estimated tax on income which passes through to shareholders. For Minnesota tax purposes, an S corporation is required to pay quarterly estimated tax if its S corporation taxes and minimum fee is $500 or more or if it has a nonresident shareholder whose share of the composite income.


CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This is also part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.
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