What is a taxable year?

A taxable year is the 12-month time period that the IRS defines for each person’s tax season. In most cases, the taxable year is the regular calendar year, starting in January and ending in December. However, a taxable year under IRS rules does not necessarily have to be a regular calendar year. In fact, the expression “taxable year” can even be slightly deceiving when considering small business owners who actually have to pay taxes quarterly. When determining your taxable year, there are a few factors that must be considered.

Determining Your Taxable Year

The first factor to consider when determining your taxable year is whether you are employed by someone else or if you are self-employed. When employed by someone else, your taxable year is always the previous calendar year. This is because your employer is handing the quarterly taxes for you with your withholding amount. If you are self-employed, there are a few more things to review when determining your calendar year.

Independent contractors and other self-employed workers need to determine whether to use your social security number, or you will be obtaining an Employer Identification Number (EIN). If you are self-employed and using your social security number, then you most likely have a standard calendar year, because this is what the IRS defaults to for social security taxpayers.

If you obtained an EIN, check your filing document to see the month you selected for your taxable year. While most business owners will typically select the standard calendar year, those who start their business mid-year will typically use a mid-year cutoff. This information can all be found in your original EIN documentation.

Case Studies: Understanding Taxable Years

Case Study 1: Calendar Year Taxpayer

John is an employee at a software company, and his employer withholds taxes from his paycheck throughout the year. For John, the taxable year aligns with the regular calendar year, starting in January and ending in December. When tax season arrives, John has four months after the end of the taxable year to file his annual taxes, ensuring compliance with IRS regulations.

Case Study 2: Self-Employed Mid-Year Business Start

Lisa is a self-employed graphic designer who started her business in July. As a self-employed individual, Lisa obtained an Employer Identification Number (EIN) for her business. In her EIN documentation, Lisa selected a mid-year cutoff, making her taxable year from July to June. When tax time comes around, Lisa has four months after the end of her taxable year to file her taxes.

Case Study 3: Standard Calendar Year for Social Security Taxpayer

Emily is an independent contractor providing consulting services. She operates her business using her social security number. Since she uses her social security number, Emily defaults to the standard calendar year as her taxable year, spanning from January to December. With this setup, Emily’s tax filing deadline falls four months after the end of her taxable year, allowing her time to complete her annual tax obligations.

Getting Help

As a general rule, regardless of the start and end month of your taxable year, you have four months at the end of it to file your annual taxes. If you are unsure how your taxable year falls or need advice on planning out your tax year, consult with your local IRS field agent or a tax attorney.