Your small business tax questions answered
At Pilot, we handle taxes for thousands of growing businesses. When you're running a company doing $1M+ in annual revenue with employees across multiple states, tax compliance gets complicated fast. Miss a deadline or file in the wrong state, and you're looking at penalties that add up quickly.
Quick reference: 2026 tax deadlines
*Falls on a weekend in 2026, so deadline moves to next business day
Subscribe to Pilot's 2026 Tax Compliance Calendar to get deadline reminders →
Critical deadlines & penalties
What happens if I miss a tax deadline?
The IRS charges two types of penalties: failure to file and failure to pay. Both add up fast. See Quick Reference chart above for penalties related to missed tax filing and payment deadlines.
Do I need to file quarterly estimated taxes?
Yes, if you expect to owe $1,000 or more in federal taxes for the year. This applies to S-Corps, partnerships, LLCs, and sole proprietors where business income flows through to your personal return, where taxes are paid at the personal tax return level
The 2026 federal quarterly deadlines:
- April 15, 2026
- June 15, 2026
- September 15, 2026
- January 15, 2027
Underpayment penalties: The IRS charges interest on the amount you should have paid each quarter. Even if you pay everything by April 15 when you file your return, you'll still owe penalties for not paying throughout the year.
What's the difference between a tax return extension and a payment extension?
Critical: An extension to file is not an extension to pay.
File Form 7004 (corporations) or Form 4868 (individuals) by the original deadline to get six more months to submit your return. But you must still pay estimated taxes by the original deadlines to avoid penalties and interest.
Pro tip: When in doubt, overestimate what you expect to owe and file an extension. You can always get a refund. Underestimating means penalties.
How do I handle 1099 filing requirements?
Send 1099-NEC forms to any US-based vendors, contractors, or freelancers you paid $600 or more during the year, unless they were a corporation.
Deadline: January 31, 2026 (both to the contractor and to the IRS)
How to stay compliant:
- Track contractor payments throughout the year
- Collect W-9 forms from all vendors before paying them
- Use accounting software that generates 1099s automatically
Multi-state tax compliance
When do I need to register for taxes in a new state?
You create "nexus" (a tax connection) in a state when you have sufficient presence there. Once you have nexus, you must register and file taxes in that state.
What creates nexus:
Physical presence:
- Office, warehouse, or retail location
- Employees working in the state (even remote)
- Inventory stored in the state
- Regular sales visits or trade shows
Economic nexus:
- Sales exceeding the state's threshold (varies, but for most states, this means at least $100,000 in sales or 200 transactions annually)
What you must do once you have nexus:
- File income tax returns (frequency varies by state)
- Pay estimated taxes if required
- Register for sales tax if you sell taxable goods/services
- Register to do business in the state with the secretary of state (consult your legal team)
How do remote employees affect my tax obligations?
Every state where you have a W-2 employee creates nexus and triggers income and payroll tax filing requirements.
What you're responsible for:
Payroll taxes:
- Withhold state income tax (if the state has one)
- Pay state unemployment insurance (SUI)
- Register with the state's unemployment agency
- File quarterly wage reports
Income taxes:
- File annual state income tax returns
- Pay estimated taxes quarterly
Other registrations:
- Workers' compensation insurance
- State-specific employer registrations
Common mistakes:
- Not registering for employment taxes when a remote employee moves to a new state
- Withholding for the wrong state (employees might owe taxes where they work, not where your HQ is)
- Missing state-specific payroll taxes beyond income tax
Multi-state complexity: If you have employees in three states, you're filing payroll tax returns in three states quarterly, plus annual income tax returns in each. This is why payroll providers and accounting services like Pilot are worth it.
Read how Pilot can help with remote employees and multi-state tax compliance →
How do I handle sales tax across multiple states?
If you sell physical goods or certain services, you likely need to collect and remit sales tax in every state where you have nexus.
Economic nexus thresholds (most common):
- $100,000 in sales OR 200 transactions in the state
- Thresholds vary by state, and not all states impose economic nexus standards
What counts as a "sale" to that state:
- Where the product ships to (not where you are)
- Where the service is performed or received
Registration process:
- Register for a sales tax permit in each state where you have nexus and taxable sales
- Collect sales tax from customers at the appropriate rate
- File sales tax returns (monthly, quarterly, or annually depending on volume)
- Remit collected taxes by the deadline
Penalties: Late filing penalties, interest on unpaid taxes, and in extreme cases, criminal charges for willful non-compliance. Many states also hold business owners personally liable for unpaid sales tax.
Marketplace facilitator rules: If you sell on Amazon, Etsy, eBay, or similar platforms, they may collect and remit sales tax for you. But you're still responsible for direct sales through your own website.
Common compliance mistakes
What are the penalties for misclassifying workers?
Treating employees as independent contractors to save on payroll taxes is one of the most expensive mistakes a business can make. Misclassifying employees as contractors can trigger major federal and state penalties, including back payroll taxes, uncollected employee withholdings, even personal liability. States can also assess back unemployment taxes, workers’ comp violations, and additional fines. To stay compliant, apply the IRS common-law test and your state’s tests.
IRS test (common law test):
- Behavioral control: Do you control how, when, and where they work?
- Financial control: Do you control how they're paid, expenses, tools?
- Relationship: Is there a written contract? Benefits? Ongoing relationship?
State tests (often stricter):
- Many states use the "ABC test": To be a contractor, they must:
- (A) Be free from your control
- (B) Perform work outside your usual business
- (C) Have an established independent business
What are my responsibilities for payroll taxes as an employer?
Payroll taxes are serious. The IRS collects them aggressively because they view them as "trust fund" taxes - money you're holding on behalf of your employees.
What you must withhold and pay:
Federal:
- Employee federal income tax withholding (based on W-4)
- Employee FICA: 6.2% Social Security + 1.45% Medicare
- Employer FICA: 6.2% Social Security + 1.45% Medicare (you pay this)
- Additional Medicare tax: 0.9% on wages over $200,000
State:
- State income tax withholding (if applicable)
- State unemployment insurance (SUI)
- State disability insurance (in some states)
Filing requirements:
- Form 941 (quarterly federal payroll tax return)
- State quarterly wage reports
- Annual Form 940 (federal unemployment)
- W-2s to employees by January 31
- W-3 to Social Security Administration
The Trust Fund Recovery Penalty (TFRP):
This is the scariest payroll tax penalty. If your business fails to pay withheld payroll taxes, the IRS can hold business owners personally liable, even if the business is a corporation or LLC. Your personal assets (house, car, bank accounts) can be seized to pay the business's payroll taxes.
How to avoid TFRP:
- Always pay payroll taxes first, before other bills
- Use a payroll service that remits taxes automatically
- Never "borrow" from payroll tax funds to cover cash flow gaps
- If you can't pay, contact the IRS immediately to set up a payment plan
Entity structure & tax planning
Should I convert to an S-Corp?
S-Corps can reduce self-employment taxes by converting part of your income into distributions, which can save in taxes, but this is partially offset by higher compliance costs for S Corps.
See below for an example based on a company with $150,000 in net income.
If you're operating as an LLC or sole proprietorship and your net income is over $60,000-$80,000, S-Corp status might save you money on self-employment taxes.
How it saves money:
As an LLC: All $150,000 of net income is subject to self-employment tax (15.3%).
- Self-employment tax: $22,950
As an S-Corp: Pay yourself $90,000 salary (subject to payroll taxes) and take $60,000 as distributions (not subject to payroll taxes).
- Payroll taxes on salary: $14,500
- Distributions: $0 in payroll taxes
- Tax savings: ~$8,450/year
The catch: Compliance costs
- Must run actual payroll (W-2 for yourself)
- File Form 1120-S annually
- More complex accounting (Pilot can help)
- Must pay yourself "reasonable compensation" beyond distributions
What's "reasonable compensation"?
- What would you pay someone else to do your job?
- Industry benchmarks for similar roles (Bureau of Labor Statistics, salary.com)
- Company profitability
- Time you spend working in the business
- If your compensation is set too low, you may be subject to penalties for avoiding payroll taxes for the “reasonable compensation” amount
When it makes sense:
- Net income consistently above $60,000
- You're willing to handle the extra paperwork
- Tax savings exceed the cost of compliance (~$2,000-$5,000/year)
- You're not planning to raise venture capital (VCs prefer C-Corps)
Talk to your accountant. Pilot can help you model the numbers.
You're not alone in this
Tax compliance for a growing business is complicated. Multi-state employees, sales tax obligations, payroll taxes, entity elections, quarterly estimates…it adds up fast.
The cost of mistakes is real: penalties, interest, audits, and personal liability. But the cost of getting help is predictable and usually pays for itself in time saved and penalties avoided.
Pilot handles bookkeeping, tax filing, and compliance for thousands of businesses like yours. We'll close your books monthly, file your taxes on time across all states, and help you avoid the costly mistakes that come with growth.
Talk to a Pilot expert about your tax situation→
Do you have any other tax questions we missed? Email us at info@pilot.com and let us know.
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