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An Overview of Startup Tax Compliance

An article we liked from Thought Leader Jason D. Rowley of Capbase:

Startup Tax Compliance: What Founders Need To Know

There’s that old saying about how the only inevitabilities in life are death and taxes. It’s true for people and for companies.

Startup TaxAnd as you’d expect, the types of taxes companies are responsible for paying can be quite different from what people pay. And while tax talk can seem boring, opaque, and even a little intimidating to many folks, it’s all pretty simple, at least conceptually. (Note: actually tabulating a company’s tax bill and paying those taxes can be tricky, and that’s why it’s probably a good idea to have an accountant or tax professional available to help out if needed.)

In this article, we’re going to go over the four-ish state tax and federal tax types that companies need to track and pay as they scale. Keep in mind that this is not tax advice nor legal advice; the goal here is to provide you, a current or aspiring startup founder, with a little more situational awareness of the corporate tax landscape. The taxes that a corporation is subject to are more complex than sole proprietors or small businesses operating in only one city or state.

We will try to give complete overview of what business owners need to know about paying corporate taxes and understanding startup costs for setting up and operating their business entity.

Franchise Tax

Corporate franchise tax is probably the easiest type of tax on companies that we’ll cover here. Basically, a corporate franchise tax is a usually nominal fee that companies pay to do business in a particular state or municipality. Some states have a higher minimum tax than others—for example, California has a minimum franchise tax of $800.

Franchise taxes are typically assessed annually and are usually collected by state governments, often (but not always) by the department of revenue in each state. Your company will have to pay franchise tax even if it’s losing money or operating at break-even. It’s just one of those “costs of doing business,” alongside nominal fees for filing annual reports and other key paperwork, that every company must pay.

You’ll have to register your Delaware C Corporation in every state in which your corporation conducts business. (Learn more about registering your Delaware corporation to do business as a foreign entity.)

Depending on the structure of your company and where you are doing business, you may need to pay franchise taxes in multiple states. For example, your Delaware C Corporation will have to pay franchise tax in Delaware, but if your headquarters is in Chicago and you have a branch office in Memphis, you may also have to pay franchise tax in Illinois and Tennessee, respectively. The tax situation for your startup will largely depend on where you hire employees, where the members of the board of directors reside, and where your company owns or leases real estate.

A number of factors can trigger foreign entity registration requirements, including the presence (or number of) employees or contractors located in the state, whether a company is required to pay income tax (or even file a zero return) with the state, and the aggregate dollar value and/or number of transactions conducted with customers in that state, among other conditions. These factors vary from state to state, and we have covered how to register in California, Washington, New York and dozens of other states on our blog.

Each state has its own requirements for registering “foreign corporations” (e.g. any company that wasn’t incorporated in that state), which is important to keep in mind when considering franchise tax exposure. Also, remember that different states have different reporting requirements and compliance calendars; while most states require filing an annual report with the Secretary of State, other states (like Ohio, for example) forgo this requirement and others require these filing to be done every other tax year.

Since the process of calculating and paying franchise tax is pretty straightforward there isn’t a lot of demand for specific software solutions for tracking exposure and maintaining compliance. However, failure to file your franchise tax return and other required tax forms in a timely fashion can cause your company to fall out of good standing with state officials.

Payroll Taxes

Most businesses have at least one employee, and there are a bunch of different employment-related taxes a company is responsible for collecting and paying. These payroll taxes can include:

  • Individual federal income tax and state income tax withholding
  • Social Security and Medicare (FICA taxes)
  • Federal and state unemployment taxes
  • Workers’ compensation / disability benefits funds

Keep in mind that every state has different employment tax structures in place. Some states, for example, don’t have an income tax, so state income withholding is not something companies in those states need to worry about. Some states also collect taxes which go toward state-run unemployment and worker disability funds, but others don’t. Pay close attention to your company’s tax obligations wherever your business is operating.

Your payroll software will generally deal with withholding tax and paying out the correct employer and employee contributions to state agencies for unemployment, payroll and income tax withholding.

Last thing to note on the employment tax front is that running payroll for employees or contractors in a state may trigger a...

Read the rest of this article at capbase.com...

Thanks for this article excerpt and its graphics to Jason D. Rowley, Head of Content at Capbase.

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