Navigating the tax landscape can be daunting, especially for those new to the entrepreneurial world. However, with the right knowledge, preparation, and support, you can ensure compliance and optimize your tax strategy. In this guide, we’ll look at the various types of taxes that startups are obligated to file and pay in the USA.
1. Corporate Tax
Corporate tax is a tax levied on the profits of a corporation. In the USA, all corporations are taxed at the federal level. Most states and some local municipalities also levy a corporate tax. It’s important to note that all businesses are obligated to file Form 1120 [↪] for federal corporate taxes, even if no income or profit was generated during the year.
…all businesses are obligated to file Form 1120 for federal corporate taxes, even if no income or profit was generated during the year.
The federal corporate tax rate for C corps is currently 21% for C corporations.
Depending on the state in which your business operates, you may also be subject to state corporate income tax [↪]. Just two states—Nevada and Wyoming—have no corporate income tax, while the others have varying rates and regulations.
2. Payroll Tax
Payroll taxes are imposed on employers or employees based on wages paid to employees. As a startup founder, if you have employees, you’re responsible for withholding and paying payroll taxes to the government. These taxes fund programs like Social Security, Medicare, and unemployment benefits. Failure to accurately file and pay federal and state payroll taxes can snowball into an extremely expensive mistake, leaving your startup on the hook for millions of dollars and jeopardizing future investment opportunities.
Failure to accurately file and pay federal and state payroll taxes can snowball into an extremely expensive mistake…
Payroll taxes typically include Federal Income Tax Withholding, Social Security Tax, Medicare Tax, and Federal Unemployment Tax (FUTA). Additionally, some states may have their own unemployment tax and other payroll-related taxes. Employers are required to file various forms, such as Form 941 [↪] for federal payroll taxes, Form 940 [↪] for FUTA, and state-specific forms for state payroll taxes.
3. State Sales Tax
State sales tax is a tax imposed by states on the sale of goods and certain services. The rates and regulations vary by state [↪]. As a startup selling products or services, you need to determine where you’ve established a nexus, and collect and remit sales tax in those states. Nexus can be established through several different means, including having a physical location, hiring employees, or meeting certain sales thresholds in a given state.
As a startup selling products or services, you need to determine where you’ve established a nexus, and collect and remit sales tax in those states.
Some startups are blindsided when learning, usually early in due diligence, that their products and/or services are actually subject to sales tax, their business has nexus in states they didn’t realize, and those independent contractors they’ve been relying on to grow so efficiently actually need to be classified as employees. Rectifying these situations can put startups on the hook for substantial back taxes, penalties and interest, so it behooves founders to take a hard look at these issues and get them squared away sooner rather than later.
To comply with state sales tax requirements, startups often need to register for a sales tax permit in each applicable state, collect sales tax from customers, and file regular sales tax returns.
4. Other Taxes
Apart from corporate tax, payroll tax, and state sales tax, your startup may be subject to other taxes depending on your activities and location. These could include:
- Property Tax: Tax on real or personal property owned by the business.
- Excise Tax: Tax on specific goods, services, or activities, such as fuel, alcohol, or tobacco.
- Franchise Tax: Some states, municipalities, and school districts impose a franchise tax on businesses for the privilege of operating or having employees in a location.
- Use Tax: Similar to sales tax, but applied to purchases made out of state for use within the state.
5. Tax Credits and Deductions
On the upside, your startup may be eligible for certain tax credits and deductions that can help reduce your tax liability. For example, the Research and Development (R&D) Tax Credit can offset costs related to qualifying R&D activities. Startups may also benefit from deductions for business expenses such as equipment purchases, marketing expenses, and employee salaries. It’s essential to explore available tax incentives and work with a tax professional to ensure you’re maximizing your tax saving opportunities.
Launching your startup is just the beginning of your entrepreneurial journey. Alongside building your product, acquiring customers, and scaling your operations, understanding and managing your taxes is crucial for long-term success. By familiarizing yourself with the different types of taxes, maintaining compliance, and leveraging available tax strategies, you can optimize your financial position and focus on growing your business. Remember to seek guidance from startup tax professionals to navigate the complexities of the tax landscape effectively.