Startup Tax Filing: What You Need to Know
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Editor’s Note: This article was originally published on December 1, 2020 and has been updated for accuracy and comprehensiveness.
If you recently made the leap from "employee" to "entrepreneur," you may have noticed that dealing with business taxes is sometimes complicated. Location, legal structure, and the number of employees affect the taxes your company needs to collect and remit each year. For example, a SaaS startup based in Austin and an e-commerce company in Alaska will have different tax rates, deadlines, and forms to worry about over the year. To help you take care of your new business tax obligations, let's go over the most common taxes you may need to deal with in the year ahead.
What is Income Tax?
Income tax is levied by the government directly on income. Just like you get taxed on your salary as an individual, your business also pays tax on its earnings. Federal, state, and sometimes local governments all collect income tax.
Who Owes Income Tax?
- Federal Income Tax: All businesses generating net income within the tax year. Note that your business will not owe any federal income tax if you operate a partnership, LLC filing as a partnership, or S-corp. For these business types, all of the business's income flows through to each business owner who, in turn, pays federal income tax on their tax return.
- State Income Tax: Businesses with net income in any state that collects income tax. If your business resides in a state that collects income tax and has a presence (sometimes called a tax nexus) in another state that also collects income tax, you may owe income tax to both states. Filing requirements vary by state, so be sure to confirm your business's state income tax obligations with a tax advisor before filing.
- Local Income Tax: Some cities charge income tax while others do not. The definition of a taxable presence in a city can also vary by location, and you may owe taxes to cities you don't have an official office. If you're unclear on your obligations here, discussing them with a professional tax advisor is best.
Please note, even if your business is not generating net income (operating at a loss), there is still an annul income tax filing obligation to report the net loss and other informational items. In addition, some states and cities impose a minimum tax or franchise tax on assets (see section Franchise Taxes below), even if your business has no net income for the tax year.
When is Income Tax Due?
Federal Income Tax Filing Deadlines
These filing deadlines depend on what type of business you operate.
- Partnership Returns (IRS Form 1065): March 15, or September 15, with an extension.
- S-corporation Returns (IRS Form 1120-S): March 15, or September 15, with an extension.
- C-corporation Income Tax Returns (IRS Form 1120): April 15, or October 15, with an extension.
If your startup is a C-corp, S-corp, or Partnership that operates on a fiscal year, not a calendar year, returns are due on the 15th day of the fourth month (C-corp) or third month (S-corp, Partnership) following the end of the fiscal year.
If you need more time to file, you can apply for an automatic extension to file your federal tax return until your business's regular filing date. Just keep in mind, the extension only grants you more time to file your tax return (the paperwork). You'll still need to estimate and pay your taxes owed by the regular deadline.
State and Local Income Tax Filing Deadlines
These deadlines vary by location (state, city) and business type. Each state and city has their own extension forms and procedure to file these forms.If you need clarification on your business's state and local income tax obligations and deadlines, work with your tax advisor to get them on your calendar.
What is Payroll Tax?
"Payroll Tax" is a catch-all term to describe a handful of different taxes that are collected directly from the wages, salary, and tips an employee earns:
- FICA Tax: Social security and Medicare
- FUCA Tax: Unemployment Insurance
- Federal Income Tax
- State Income Tax
Who Owes Payroll Tax?
As an employer, you must withhold the correct payroll tax amount from each employee's salary and pay it to the government. Payroll tax can be difficult to manage manually, so we strongly recommend partnering with a professional service like Gusto or Rippling to take care of this for you.
When is Payroll Tax Due?
How, when, and where your business's payroll taxes are filed depends on various factors. For instance, your company may be obligated to report and remit federal income tax, Medicare, and Social Security deposits semi-weekly, monthly, or annually. Each state and city also has specific rates and deposit schedules that dictate how state and city income taxes should be paid. You can read more about particular deadlines and criteria here or ask your tax advisor which requirements might apply. Once again, to avoid unnecessary headaches, we recommend using a professional payroll service to handle this for you.
What is Franchise Tax?
Some states charge businesses franchise tax for the right to incorporate or do business in their state. Franchise taxes are commonly filed annually and oftentimes with the annual business income tax return. Depending on your business type and the state where franchise taxes are owed, franchise taxes can be a percentage of your business's assets, net worth, or capital stock, or a flat or minimum amount.
Who Owes Franchise Tax?
Partnerships, LLCs, and corporations that do business in a state that administers franchise tax are required to pay this levy unless they qualify for an exemption. Similar to state income tax filing, your corporation may owe franchise tax to additional states if it is based in a state that collects franchise tax and has a presence (nexus) in another state that also collects franchise tax.
When is Franchise Tax Due?
The franchise tax is assessed and filed annually; filing deadlines vary by state. If you fail to remit the franchise tax, you risk having your business disqualified from operating in the state where the franchise tax is owed, so be sure to confirm if and when you might need to pay.
What Is Sales Tax?
Sales tax applies to the sale levied on the buyer of specific goods and services. The seller is responsible for computing and collecting sales tax from the buyer at the point of purchase and paying it to the state and city tax authority where it is owed. Because sales tax is governed at the state and city level in the U.S., it's one of the more confusing taxes to calculate and file,and of the easiest to get wrong. There are huge variances in sales tax regulations, rates, filing deadlines—even how sales tax is calculated and collected—so it is best to use a specialized service to make sure your startup is getting it right.
Who Owes Sales Tax?
You're required to collect sales tax from buyers and send it to the IRS if:
- Your business sells taxable products in a state that collects sales tax
- You provide services in a state that imposes sales tax on services
If your business has a tax nexus anywhere outside of its home state, it may also owe sales tax in that state.
When is Sales Tax Due?
Sales tax and extension filing deadlines vary by state and type of return. Your business's sales tax filing and payment deadlines will depend on where your business is responsible for collecting and remitting sales tax. Again, using a professional service for this will simplify managing this tax.
Tax office advisory forms don't require you to pay any additional money. But you'll need to file them to let the IRS know what other people (e.g., your employees or independent contractors) will have to pay.
You'll need to file two copies of Form W-2 for every employee in your business. The filing deadline for Form W-2 is February 1. Send one copy to the IRS and the other to the employee on or before this date.
If your business is a partnership, LLC filing as a partnership or S-corp, or S-corp, you'll need to file Schedule K-1 as part of your tax return. Schedule K-1 reports each owner or partner's share of business profits, losses, deductions, and credits to the IRS. Because Schedule K-1 is filed with your business's federal tax return, the filing deadline is the same as your startup's tax filing date. Note that state and city income tax returns may also have a K-1 equivalent that is due with the filing of the state and city income tax return.
If you paid an independent contractor more than $600 during the tax year, you'd need to file two copies of Form 1099-NEC—Copy A to the IRS and Copy B to the contractor. The deadline for filing Form 1099-NEC is January 31.
Form W-8BEN or Form W-8BEN-E
These forms report information about a non-U.S. contractor or entity earning money from U.S. employers. If your company hired a foreign independent contractor, have them fill out a Form W-8BEN before you pay them.
If your company works with a foreign corporation,Partnership, or an entity of another business type, have them send you a Form W-8BEN-E before you pay them.
Launching a new business is one of the most exciting experiences you can go through as an entrepreneur—until it's time to deal with business taxes. The good news is that you can tackle your business taxes with others. Learn how Pilot's full-service tax prep can help.