Witten by Justin McLoughlin, airCFO Founder
For any company, implementing optimization strategies to reduce tax liability and stay legally compliant is mission-critical to the health of the business. And startups are no exception. With startups, however, it’s unlikely that you have a full-time tax expert on the team. Some try to “wing it” – often with disastrous results.
In this article, we’ll answer these commonly asked questions:
- What taxes do startups need to pay?
- What if we’re not profitable yet? Do we still have to pay?
- What if we haven’t filed past taxes?
If you want a clear path to tax compliance, protecting your cash flow, and avoiding litigation, read on.
What taxes do we need to pay?
We’re all familiar with the types of taxes we pay every year, including Federal, State, and Local taxes.
- Federal income taxes are the type of income tax most people are familiar with. If you are profitable, this will likely be your largest income tax expense.
- Many states levy income taxes on businesses. For example, California levies an 8.84% income tax on C corporations other than banks and financial institutions and a 1.5% tax on S corporations other than banks and financial institutions.
- Some cities have their own income taxes as well. You can check with your city’s Treasurer (or your tax accountant) for your specific situation.
Are there other taxes our startup has to pay?
In a word, maybe.
Tax obligations are tied to business formation, location, employees, and so on. It’s important to have a full understanding of the tax liabilities for your startup based on the unique factors of your business.
Having said that, here are some common tax buckets:
The moment you hire employees, you owe payroll taxes – taxes paid on salaries and wages. (This is why many startups choose to hire contractors before they hire employees.)
Both you as the employer and your employee(s) pay this tax. You withhold the employee’s portion from their paycheck and then combine it with your portion when remitting to relevant tax authorities.
Because payroll taxes can get complicated, we recommend using payroll software, such as Gusto, Rippling, or Justworks, to automate much of this work and keep you compliant.
Once you start earning revenue, you may be responsible for sales tax. Thanks to a concept called economic nexus, you may be responsible for paying sales taxes to any state in which you sell your products. Companies tack sales tax onto the price of their products or services but set aside the sales tax collected to remit to the government.
Sales tax laws and rates differ between states, making this quite a challenge to handle on your own. This is a great example of an area where you can outsource to experts, like our team at airCFO, so you can focus on getting leads and generating sales.
The franchise tax is a levy paid by certain types of businesses that want to do business in some states. Some entities are exempt from franchise taxes, such as nonprofits and some limited liability companies.
Revenue tax is an additional tax paid on commercial revenue.
Franchise and revenue taxes aren’t as clearly defined as the previous types of taxes. You have to dig into each state where you do business to find out how these taxes work.
A common example startups face is the Delaware C Corporation franchise tax. If you incorporate in Delaware, you must file an annual franchise tax return and pay a tax based on your assets.
Another example for California-based startups: San Francisco and Los Angeles. Both cities collect a gross receipts tax. This applies to your top-line revenue — before deductions for your expenses. They also have a tax basis on your total payroll expense within the city limits. Additionally, California has an $800 franchise tax for anyone doing business in the state.
When do we have to pay startup taxes?
If your startup is profitable, you have to pay your federal taxes quarterly. Depending on your state and city, you may also need to pay those taxes quarterly.
What if my startup isn’t profitable yet? Do I still have to pay taxes?
If you’re not profitable, you most likely will not owe Federal or State taxes. However, you still have to file your tax return each year.
Most startups that are not yet profitable can file a six-month extension if they need more time. The due date for C-corporations is generally April 15th, and the extended due date is October 15th. For S-Corporations and LLCs the due date is March 15th (or September 15th with an extension).
Having said that, depending on your startup’s specific setup, you may still owe local tax, payroll tax, sales tax, and/or franchise and revenue taxes.
We’re here to help.
US taxes for startups are complicated. We can help make it simpler.
Our team brings decades of public and private tax experience across many industries including tech, media, online retail, healthcare and more. We go beyond simply filing taxes to deliver value-added strategies focused on providing business solutions. We analyze current tax rules, regulations, and other guidance to make sure you’re in compliance with every step of your startup journey.
Find out how we can help you by scheduling a discovery call now.