How Your Corporation Will Be Taxed
In this guide, you'll learn about the main types of tax in New Mexico that apply to corporations, including sales, self-employment, corporate and federal taxes.
How your corporation is taxed will depend on whether it's an S Corp or a C Corp.
New Mexico State Tax
There are three types of New Mexico tax you must pay to the NM Taxation and Revenue Department: income, gross receipts and franchise.
Important: All of these taxes apply whether you have a C Corp or an S Corp.
New Mexico Income Tax
Anyone who takes earnings out of your corporation will need to pay NM income tax and will be taxed at the state's standard rates. Any employees will also need to pay state income tax. The current income tax brackets for New Mexico vary depending upon your filing status and income. The top tax bracket is 4.9 percent.
New Mexico Gross Receipts Tax
Most states have a Sales and Use Tax that is applied to the sale of physical products (such as electronics, cars, books, furniture, appliances, raw materials, etc.) or certain services. New Mexico is different in that it levies a gross receipts tax on businesses on the total amount of money or other consideration received from certain activities.
The Gross Receipts Tax rate varies throughout the state from 5.125 percent to 9.4375 percent. There is a variance because the total rate combines rates imposed by the state, counties, and, if applicable, municipalities where the businesses are located. Your corporation will pay the total Gross Receipts Tax to the NM Taxation and Revenue Department, which then distributes the counties’ and municipalities’ portions to them.
NM Corporate Income and Franchise Tax
Some states — including New Mexico — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax or privilege tax. In New Mexico, it's the Corporate Income and Franchise Tax.
New Mexico talks about the Corporate Income and Franchise Tax as if they are one, but in reality, they are separate.
Federal Taxes for Corporations
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your New Mexico corporation is paying the correct amount, and that you're paying the correct individual amount.
Federal Taxes for C Corps
All shareholders who earn wages or a salary from a C Corporation must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Federal Taxes for S Corps
The Internal Revenue Service allows a corporation to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.
Consult with your accountant or tax advisor for more information on reducing your self-employment tax through an S Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Unlike a limited liability company or an S Corporation, a C Corporation is required to file a corporate tax return and pay taxes on any profits.
When those profits are paid to shareholders as dividends, they will also be subject to taxation on the shareholders' personal tax returns.
This is often referred to as “double taxation,” and is one reason many business owners prefer to file their taxes as S Corporations.
Note: It is possible for a C Corp to file taxes as an S Corp. Consult with your accountant or professional tax advisor for more information.
A C Corporation may pay shareholders dividends as a share of the profits of the company. The value of dividends to which each shareholder is entitled depends on how many shares they own.
Dividends distributed to shareholders are taxed twice — first at the corporate level as profit (on the corporation’s Form 1120, the U.S. Corporation Income Tax Return) and again at the individual level as stock dividends (on the shareholder's Form 1040, the U.S. Individual Income Tax Return).
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
If you expect to owe $500 or more in income tax, you must make four quarterly estimated tax payments to the IRS. You'll estimate your total tax on Form 1120-W, then pay 25% on each due date. Please note that the IRS will no longer be updating Form 1120-W, so follow up with your accountant with any questions on estimated tax payments after 2023.
Important: This applies to you as the owner of the C Corporation, not the business itself. A C Corporation does not pay income tax.
It's a little less straightforward for an S Corp, which will pay estimated taxes by filing an IRS Form 1120-S, which is the income tax return form for S Corps.
Also, as the owner of an S Corp, you'll need to make estimated payments on self-employment tax.