By many accounts, it’s the least wonderful time of the year. As we venture from winter to spring, tax deadlines start to loom large. For a VC-backed startup, that means a fairly sizable list of to-dos.
Don’t panic. Filing your company’s taxes could be easier than you think.
How can founders prepare for tax season without the stress?
If the thought of the tax deadline is already filling you with tension, take a beat. We have a handful of suggestions to help.
First, we’ll call your attention to a few areas. Knowing about these key considerations now gives you ample time to address them, alleviating some of the stress. Additionally, we’ll give you some tips to find the right partner to help you navigate your filings.
LLC vs. C-corp tax filings: what founders need to know
The deadlines and paperwork requirements depend on your entity type, so let’s break it down:
- LLCs: If you’re operating an LLC, the way you get taxed — and your deadline for filing — varies:
- If you’re a single-member LLC, you can file as a sole proprietor. In that case, you don’t need to prepare a separate business filing. Instead, you report business income on Schedule C of Form 1040 on your personal tax returns. That’s due to the IRS by April 15.
- If you have more than one member, you can file as a partnership or elect to file as an S-corp or C-corp. Partnerships need to submit Form 1065 to the IRS, while LLCs filing as S-corps file Form 1120S. Both of those are due March 17 next year (since March 15 falls on the weekend).
- If you elect to get treated as a C-corp, this next section applies to you.
- C-corps: The IRS requires C-corporations to file their tax returns on Form 1120. The deadline for that paperwork is April 15th.
Tax FAQs for VC-backed startups
To make this tax season easier for you, we want to briefly answer a lot of the frequently asked questions we get from clients.
Which tax filings do startups need to stay compliant?
Federally speaking, all startups need to file:
- Income tax returns
- Payroll taxes (assuming you have employees)
- 1099-NECs if they paid any contractors more than $600 in any given year
You’re subject to state tax filing requirements, too. These vary from state to state, but they usually include a:
- State income tax filing
- Annual report along with fees or franchise taxes to operate your business in that state
- Payroll taxes (assuming you have employees)
- Sales tax returns (assuming you operate in a state with sales tax)
In short, the tax filings your company is required to file depends on your entity type (e.g., C-corp vs. LLC) and the state(s) in which you operate. A CPA can help you figure out precisely what’s required for your startup to stay compliant.
Payroll tax vs. income tax: what’s the difference?
If you have employees, your business is responsible for paying both income and payroll tax.
Income tax is the tax you pay on your company’s profits. The more you make, the more you’ll need to pay here. That’s true federally, and the vast majority of states charge a corporate income tax, too. A handful of states tax your gross receipts rather than your profits, but only Wyoming and South Dakota don’t tax business income.
Payroll taxes, on the other hand, are taxes you pay when you have employees. These taxes get calculated as a percentage of the amount you’re paying the employee. They go to fund programs like Medicare and Social Security.
How do remote teams impact your startup’s tax compliance?
If your employee works from another jurisdiction, it can establish a nexus for your company there. That might be enough for you to be required to pay taxes in that state or municipality.
These laws vary by state. As a result, it’s important to investigate what a nexus in that state would mean before you allow an employee to work from that locale.
What do startups need to know about the R&D tax credit?
They need to know that this is a potential way to majorly slash your tax bill (think: hundreds of thousands of dollars). The IRS lets you claim a credit for money your company spends on research and experimentation, and that includes salaries for people undertaking that work (e.g., software engineers).
Another thing to know: the way you can take this credit has changed in recent years. Per updates to Section 174 of the Internal Revenue Code, you now need to capitalize those expenses over several years: five for domestic expenses and 15 for foreign ones.
What should you look for in a startup tax expert?
Clearly, there’s a lot that the decision-makers at VC-backed startups need to know in order to navigate their company’s tax requirements. But you don’t have to — and, really, shouldn’t — go it on your own.
A good accounting partner for your company helps you stay in compliance and well-prepared for all of the filings that are applicable to your business.
Specifically, look for someone who’s actually a CPA — meaning they’re state-certified and required to take continuing education to stay informed about the latest tax requirements. And find a CPA who has experience working with VC-backed companies. Between reporting to investors and maximizing the R&D credit, a seasoned startup accountant can do a lot to help your company thrive.
Filing startup taxes: how to get it right the first time
Once you find your accounting partner, carve out some time to get ramped up with them. Tax issues arise when things get missed. You want to walk your accountant through the granular details of your financial picture. This way, they can help you pinpoint filing requirements — and tax savings opportunities — so you can do it right the first time.
Ready to learn more? Let’s talk!
Tax season is no time to drag your heels. To see if our team could be the right fit for your VC-backed company, contact us today.
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