How to File Your Startup Taxes the Right Way
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For most startups and growing businesses, tax season is stressful, especially when meeting filing deadlines. That’s why turning to a tax accountant for help makes sense. But how do you know what makes a good tax accountant, or what you should look for in a tax accountant?
We’ll answer these questions and more as we dive into the ins and outs of direct and indirect expenses, the US R&D Tax Credit, LLC filings, and what taxes you should always file.
What Do You Look For in a Tax Accountant?
When it comes to finding a tax accountant, there are a few things to consider.
- Ensure they are familiar with your industry and company - this will help them understand the types of deductions available to you and how those deductions can lower your tax bill.
- Look for an accountant with experience working with businesses similar to yours—not just individuals or small businesses like restaurants or shops, if relevant. Larger corporations may require specialized knowledge to meet their obligations and save money on taxes and maximize any deductions available under the law.
- Ask if they can provide references. Ask for referrals from other clients to see if their services worked well for them. Trust is critical for a successful relationship with your tax accountant, so it is worth hearing from others who have worked with the accountant you are evaluating for your business.
- Perhaps most importantly, make sure whoever does your taxes understands how important timeliness is when filing returns. It would help if you had someone who could meet deadlines without sacrificing accuracy or quality workmanship. An accountant who can help you save money on taxes and file your tax returns on time is invaluable.
How Do You Prepare Your Business for Tax Season?
For starters, make sure you have all the necessary documents and information. Read: please keep track of your receipts and keep them organized. You should also have a system for filing away important documents like contracts, agreements, business licenses, etc. Once you find a filing system that works for your business, stick to it. Also, keep track of your finances to ensure you have enough money to pay for everything. It’s essential to keep your business finances separate from your personal finances, so try not to dip into any money in the business account (unless it’s an emergency).
Then get a good tax accountant, even if it means paying more than usual (it’s worth it).
How Do Remote Employees Affect Business Tax Obligations?
There are two types of business taxes relevant to most remote-first startups from the inception of the business: payroll and state income tax. People who work remotely can affect your payroll taxes and state income tax obligations. Generally, if a company has employees working in a state, the company should file payroll and state income tax returns in that state, as having an employee in the state can create a nexus. Nexus is the connection between a business and the state, and creates the filing obligation.
If you live in California and hire remote employees who work out-of-state or internationally, there may be some complications concerning these two types of taxes because they aren’t always legally required based on location alone.
The laws surrounding this are complicated and can vary from state to state, so employers must know their requirements and obligations to comply with all applicable regulations.
How Does the US R&D Tax Credit Work?
The R&D tax credit is an excellent incentive for small businesses and corporations that can be used to offset the costs of developing new products, improving existing ones, or conducting research. But there are some nuances that you should be aware of.
The main thing to know about the R&D tax credit is that it’s limited to development of proprietary technology or goods, and costs incurred in the U.S. (or Puerto Rico). So, if your company does its research overseas—and many do—you won’t qualify for this benefit.
What Taxes Do Businesses Always Need to File?
Federal and state payroll and income tax returns are the most common taxes you will file. Income taxes are based on the company’s net income.payroll taxes are generally based on wages paid to your employees. These taxes enable the federal government to provide services like national defense, Social Security benefits, and Medicare. State and local taxes help fund more local institutions and initiatives, such as public schools, police and fire departments, transportation, and infrastructure in your area.
Businesses generating revenue may also have additional collection and filing requirements, such as collecting and remitting sales taxes on goods and services they sell.
What Is the Difference Between Payroll and Income Tax?
Payroll taxes are remitted by the employer, and includes employee withholding and out-of-pocket obligations.
Income tax is generally calculated based on the company’s net income, then filed with the IRS by April 15th (Tax Day) or six months after Tax Day if the company files for a six-month extension. Many states impose a minimum tax or franchise tax on unprofitable companies, so tax payments may be due each year even if your company does not have net income.
What Is the Difference Between LLC and C Corp Filings?
LLCs and C Corps are two different types of business entities. Both have unique tax filing requirements, but there are some critical differences between them to keep in mind.
LLCs are taxed as partnerships by default and therefore don’t pay taxes themselves; instead, the income passes through to its owners, who then report it on their income tax returns. LLCs with multiple members must file any forms with the IRS or state government.
On the other hand, C Corps are taxed as corporations separate from their owners.s. This gives them legal personhood to operate separately from their owners, such as entering into contracts and owning assets.
What Goes Into Filing Taxes Correctly?
Correctly filing your taxes means adhering to all of the rules and regulations that are in place for you as a taxpayer. It also means filing your income tax returns on time to avoid penalties and interest.
Interested in more information about startup and small business taxes? Watch our webinar, Your Tax Questions Answered, where Pilot’s seasoned tax experts, David Kelm, Business Tax Services Manager, and Justin Wiguna, Senior Product Manager, have an engaging discussion on everything tax.
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