Tax Essentials for Startups

Your Business Structure

The taxes your startup should pay depend on your business structure. Most structures file income tax returns, while partnerships file information returns. The type of return varies by structure. If you have a limited liability company (LLC), you elect how the LLC should be treated for tax purposes. This election controls what you file and when.

Estimated Taxes

Generally, your business must regularly pay income tax throughout the year. And if you are your own employer, you may owe self-employment taxes.

Self-Employment Taxes

When you employ yourself, you owe taxes (in addition to income tax) at a rate of 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. You must pay if you earn $400 or more from self-employment. You pay an additional 0.9% Medicare tax if you make more than a certain level of income.

Self-Employment Defined

The Internal Revenue Service (IRS) defines being self-employed to include:

• Sole proprietors

• Partners

• Members of LLCs treated as partnerships

• Being "otherwise in business for yourself"

Depending on whether you receive a salary, distributions, or a combination of both, you may also owe self-employment taxes on funds earned through an S corporation. Typically, you owe self-employment tax on the amount you pay yourself as a salary. Please Note: Because C corporations are separate entities for taxation purposes, they don't qualify for self-employment taxes.

Income Taxes

You may need to regularly make estimated income tax payments if your business is a:

• Sole proprietorship

• Partnership

• Corporation

• LLC

You must make estimated tax payments if you expect to owe $1,000 or more in taxes when your return is due. Corporations must make estimated payments if they expect to owe $500 or more at that time.

When You Pay

Generally, you pay estimated taxes four times per year:

• April 15

• June 15

• September 15

• January 15

If you earn income unevenly, you can make unequal payments based on when the income is received.

How You Pay

Individuals can determine how much they should pay using Form 1040-ES. Corporations can generally use their current year's or previous year's earnings. For startups with no previous year to rely on, you can refer to your profit and loss records. You can pay your taxes online, by phone, or by mail. The IRS recommends paying online as the easier and more efficient option.

Your Tax Year

Identifying your tax year is another essential element of understanding taxes for startups. You can use either the calendar year or your fiscal year as your tax year. Your fiscal year can start in any month and must end 12 months later, but a fiscal year cannot begin in January and end in December. Startups may have a short-year return for the initial filing.

Employment Taxes

Not every startup has employees at the earliest stages, but you can expect to hire at some point as your business grows. As an employer, you must collect, deposit, and report employment taxes.

Collecting Taxes

Employment taxes include what employees owe in:

• Federal income tax

• State income tax

• Social Security

• Medicare

If any employee makes more than $250,000 for married filing jointly ($150,000 married filing separately; $200,000 for other filing statuses), you must collect an additional 0.9% Medicare tax. You generally withhold those amounts based on a Form W-4 completed by each employee. At the end of the year, you should provide each employee with a completed Form W-2. Along with the taxes you collect through withholding, you must pay the employer's portion of Social Security and Medicare in addition to Federal Unemployment (FUTA) Tax from your business. These amounts are not from your employees, so you should not withhold these amounts.

Depositing and Reporting Taxes

You can remit the taxes you pay and withhold online. You'll need your Employer Identification Number (EIN) and an online account.

Independent Contractors

If you hire independent contractors, you generally need not withhold taxes. However, you will need to provide a Form 1099 to each contractor.

Excise Taxes

Excise taxes are imposed on the sale of specific goods, services, and activities. Before you begin an activity that requires you to pay excise taxes, you must register with the IRS.

Generally, you owe excise taxes on:

• Fuel

• Ozone-depleting chemicals (ODCs)

• Certain manufacturing

• Communications

• Air transportation

• Passenger ship voyages

• Heavy trucks, tractors, and trailers

• Indoor tanning services

Several credits and potential refunds may apply depending on the tax.

The manufacturing excise tax covers:

• Fishing equipment

• Electric outboard motors

• Archery gear

• Coal

• Certain tires

• Gas guzzlers

• Vaccines

You file and pay quarterly using Form 720.

State and Local Taxes

Beyond federal taxes, you might be liable for state and local taxes since the specifics vary widely by location. Such additional taxes may include state (or local) income, sales, franchise, and property taxes. To determine what taxes you will owe, you can consult your state's website, an accountant, or a tax attorney familiar with your state's laws.

Credits and Deductions

New businesses can save through tax credits and deductions. While business startup deductions can lower your taxable earnings, tax credits may directly lower your federal income tax.

Startup Tax Credits

One commonly claimed startup tax credit is the research credit, sometimes called the research and development (R&D) or research and experimentation (R&E) credit. To qualify, you must identify:

• The parts of your business involving research

• The activities performed

• The individuals who performed the activities

• The information the individuals were attempting to discover

• All research-related expenses on Form 6765

Your business may also qualify for the:

• Work opportunity tax credit—hiring individuals from groups that have faced barriers to employment

• Employer-provided childcare credit—providing childcare to employees

• Clean vehicle credit—buying an electric vehicle (EV) or fuel cell electric vehicle (FCV) for business use

• Credit for builders of energy-efficient homes—building or reconstructing energy-efficient homes

• Advanced energy project credit—investing in qualifying advanced energy projects

• Rehabilitation credit—rehabilitating historic buildings

You can invest in a qualified opportunity zone to earn a credit.

Startup Tax Deductions

One of the best ways to lower your tax bill is by deducting business expenses. You may deduct most of the costs associated with operating your business, including:

• Vehicle (car and truck) expenses

• Depreciation

• Employee pay

• Insurance

• Interest

• Legal and professional fees

• Pension plans

• Rent expenses

• Taxes

• Travel expenses

• Exclusive business use of your home

• Advertising

• Education expenses

• Licenses and regulatory fees

• Repairs and maintenance fees

• Supplies and materials

• Utilities

You may also be able to deduct costs for increasing energy efficiency in a building you own or for bad debt expense (if you are an accrual-basis taxpayer).

Managing Your Taxes

Maintaining accurate and detailed financial records is essential for efficient management and tax compliance. If you’re overwhelmed, you can always consult a tax attorney or certified public accountant to help you make sense of what you need to do to ensure you meet your tax obligations. Developing a proactive approach to tax management, including regular consultations with a tax professional, can save you time and protect against costly errors and penalties. Ultimately, you may be surprised to find you owe much less than you expect.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.