What Months Are Income Taxes Based On?

In the United States, income taxes are calculated based on all income earned within a 12-month period known as a tax year. This timeframe is used to report income, track expenses, and determine your tax obligation. All financial activities, from wages to investment gains, are aggregated within this defined period to compute taxable income. The Internal Revenue Service (IRS) requires this annual accounting period to administer the tax system.

The Calendar Tax Year

The most common tax year is the calendar year, a 12-month period from January 1 to December 31. The vast majority of individual taxpayers use this system. For example, a 2024 tax return filed in early 2025 will cover all earnings and financial activities that occurred within the 2024 calendar year.

Using the calendar year is a requirement under certain conditions. The IRS mandates the calendar year if you do not keep formal accounting books or have an established annual accounting period. Since most individuals do not maintain complex business records, the calendar year becomes their tax year by default.

After filing your first tax return using the calendar year, you must continue to use it for subsequent filings, including for any business you start as a sole proprietor. The business’s income is reported on your personal tax return, so it must follow the same tax year. Changing from a calendar year requires IRS approval, which is requested by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year.

The Fiscal Tax Year

An alternative to the calendar year is the fiscal tax year, which is a 12-month period ending on the last day of any month except December. This option allows a business to align its tax year with its natural business cycle. For example, a retail business might choose a fiscal year ending on January 31 to include the entire holiday shopping season in one accounting period.

Corporations, partnerships, and some limited liability companies (LLCs) are the most common users of a fiscal tax year. A fiscal year is adopted when the entity files its first income tax return. Once chosen, the business must continue to use that fiscal year unless it receives permission from the IRS to make a change.

A less common variation is the 52-53-week tax year. This is a fiscal year that always ends on the same day of the week, varying between 52 and 53 weeks in length. This method is used by some businesses to create comparable financial periods from one year to the next.

Understanding Short Tax Years

A tax period lasting less than 12 months is known as a short tax year. This is an exception to the standard annual accounting period and arises in specific circumstances. A short tax year requires filing a tax return for the abbreviated period, and the tax is calculated differently than for a full year.

A short tax year can occur when a new business starts partway through its chosen tax year. For instance, if a corporation using a calendar tax year is formed on July 1, its first tax year would run from July 1 to December 31. The business would then file a return for this six-month period.

A short tax year also occurs when a business closes before the end of its tax year. This also applies to the final tax return for a deceased individual, which covers the period from the start of their tax year until the date of death. No estimated tax payments are required if the short tax year is less than four full months or if the tax due is less than $500.

Aligning Tax Payments with Income Months

The U.S. tax system is “pay-as-you-go,” meaning you must pay tax on income as you receive it. This is done through employer withholding for wage earners or estimated tax payments for other income sources like self-employment or dividends. These payments are required throughout the year, even though your final tax liability is calculated for the full tax year.

For those paying estimated taxes, the year is divided into four payment periods. You must align your payments with the months you earn the income to avoid potential underpayment penalties. If you expect to owe at least $1,000 in tax for the year after subtracting withholding, you must make these quarterly payments.

• Payment 1: Covers income from January 1 – March 31, due April 15.
• Payment 2: Covers income from April 1 – May 31, due June 15.
• Payment 3: Covers income from June 1 – August 31, due September 15.
• Payment 4: Covers income from September 1 – December 31, due January 15 of the next year.