Startup Tax Filing: What You Need to Know
If you recently made the leap from “employee” to “entrepreneur,” you may have noticed that dealing with business taxes is a whole different ball game.
Things like location, legal structure, and number of employees can all affect the taxes your company needs to collect and remit.
For example, a SaaS startup based in Austin and an ecommerce company in Alaska will each have a very different set of tax rates, deadlines, and forms to worry about over the course of the year.
To help you take care of your new business’s tax obligations, let’s go over the most common taxes that 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 that generated net income within the tax year. Note that if you operate a partnership, LLC filing as a partnership, or S-corp, your business itself will not owe any federal income tax. 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 personal tax return.
- State Income Tax: Businesses with net income in any state that collects income tax. If your business is based 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 in. If you’re unclear on your obligations here, it’s best to discuss with a professional tax advisor.
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 following the end of the fiscal year.
If you need more time to file, you can apply for an automatic extension of time to file your federal tax return right up until your business’s regular federal tax 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. If you’re unclear 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 are required to withhold the correct amount of payroll tax from each of your employees’ salaries and pay it to the government.
Payroll tax can be difficult to manage manually, and we strongly recommend that you don’t try and handle it yourself. Instead, use 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 depend on a variety of factors.
For instance, your business may be obligated to report and remit federal income tax, medicare, and social security deposits on a semi-weekly, monthly, annual, or next-day basis. Each state also has specific rates and deposit schedules that dictate how state income taxes should be paid.
You can read more about specific deadlines and criteria here, or ask your tax advisor which requirements might apply to you.
Once again, to avoid the unnecessary headache, we recommend using a professional payroll service to handle this.
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. Depending on the type of business you operate and the state where franchise taxes are owed, franchise taxes can be a percentage of your business’s income or a flat 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?
Franchise tax is assessed and filed on a yearly basis and filing deadlines vary by state.
If you fail to remit franchise tax, you risk having your business disqualified from operating in the state where franchise tax is owed, so be sure to confirm if and when you might need to pay.
What Is Sales Tax?
Sales tax is applied to the sales of certain goods and services. The seller is responsible for collecting sales tax at the point of sale and paying it to the state tax authority where it is owed.
Because sales tax is governed at the state level in the U.S., it’s one of the more confusing taxes to calculate and file. It’s also one 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’s 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 filing deadlines 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, you’ll need to file Schedule K-1 as part of your tax return.
Schedule K-1 is used to report 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.
If you paid an independent contractor more than $600 during the tax year, you’ll 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 February 1.
Form W-8BEN or Form W-8BEN-E
These forms are used for reporting 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 worked 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 don’t have to tackle your business taxes alone. Learn how Pilot’s full-service tax prep can help.