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Starting a new business is exciting–until tax season arrives. Then you’re suddenly forced to deal with terms like passive activity loss and transfer pricing. It gets especially complex if you face tax obligations in multiple jurisdictions because of an international presence.
In this guide, we’ll review what you need to know about startup taxes and how specialized tax services can help you manage your tax obligations and stay compliant.
Does Your Startup Need to File a Tax Return?
All startups typically need to file a tax return, even before generating any revenue. Your tax filing obligations depend on your business structure and location.
Even if your startup doesn’t generate revenue, it’s best to file tax returns so you can claim business expenses and offset them against future income. You may also have to file state or local tax returns depending on where your business operates in the United States.
Startup tax deadlines in the US
Here’s a quick overview of when you must file your tax returns based on your business structure:
- Sole proprietorships: By April 15th of each year.
- Partnerships: By the March 15th of each year, or the 15th day of the third month after the end of the partnership’s tax year.
- Limited liability companies (LLC): By April 15th for single-member LLCs and March 15th or 15th day of the third month after the partnership’s tax year for multi-member LLCs.
- Corporations: By April 15th for C Corps and March 15th for S Corps.
Tax forms to file in the US
Here are the forms used to file tax returns based on the business structure:
- Sole proprietorships: A sole proprietor’s business income and expenses are reported on the personal tax return, generally on Schedule C of Form 1040.
- Partnerships: Partners report their share of income, deductions, and credits on their personal return using Schedule K-1, while the partnership firm files Form 1065, an informational return.
- Limited liability companies (LLC): A single-member LLC is a disregarded entity for tax purposes. Income and expenses are reported on personal tax returns just like a sole proprietorship. Multi-member LLCs typically file tax returns as a partnership using Form 1065. Note that LLCs can also elect to be taxed as C Corps or S Corps.
- Corporations: C Corps file Form 1120. S Corps file Form 1120-S and the shareholders report income on their personal returns using Schedule K-1.
Tax Services for Startups
The tax filing process includes multiple steps and there are different partners to work with at each step. Some providers offer turnkey tax filing services, which may be more cost-effective for startups but it can be best to bring in professionals with expertise in various areas. Let’s talk about who service providers you may need to collaborate with.
Accounting
Accounting firms take care of your books. Once you’ve journalized all the entries throughout the year or entered transactions into your accounting software, the accountants take over. They check, or audit if necessary, the financial documents generated by the accounting software and other accounting records.
Best accounting firms for startups:
Compliance
You need compliance experts to take care of complex parts of the tax filing process. Not all startups need a compliance team, but you might need one if you don’t have someone in-house who understands employee tax withholding or investor compliance.
Best compliance firms for startups:
Tax filing
Tax filing services can be a good option once your tax returns get more complex. If you operate in multiple jurisdictions, need help identifying and understanding industry-specific deductions, or just need someone to handle your taxes so you can focus on the core business, a tax filing service can help.
Best tax filing firms for startups:
Tax advisory services
Tax advisory services are highly beneficial. They can help you save taxes in the short term and develop strategies that minimize your tax liability over the long term. For example, they’re a great resource to lean into if you operate in regions or industries with complex tax laws, earn foreign income, or expect an M&A transaction soon.
Best accounting firms for startups:
Common Tax Mistakes Made by Startup Founders (To Avoid!)
Taxes are a steep learning curve for most startup founders. Unsurprisingly, founders often make mistakes when dealing with tax-related issues. Here’s a quick overview of common mistakes to watch out for as a startup founder:
- Choosing the wrong business structure: Choosing the wrong business structure can lead to higher tax liabilities. For example, failing to elect S-Corp status can result in higher self-employment taxes.
- Neglecting estimated tax payments: Many startup founders are caught off guard when they see a large tax bill at the end of the year because they didn’t make estimated payments. When your estimated tax payments for the current year exceed $1,000, you must make monthly payments for such taxes. Not making these payments attracts penalties and interest charges from the IRS.
- Misclassifying employees as independent contractors: You’re responsible for payroll taxes, workers’ compensation, and unemployment insurance for employees, but not for independent contractors. If you erroneously classify a worker as an independent contractor and the IRS decides to reclassify them as employees, you could end up paying significant penalties and back taxes.
- Overlooking available tax deductions and credits: Startup founders are often unaware of the wide range of deductible expenses and tax credits that can decrease their tax bills, such as subscriptions, business meals, research and development (R&D) tax credits, and home office expenses. Make sure you speak to your advisor and claim all the expenses and credits available to minimize your tax liability.
- Poor record-keeping and lack of documentation: The IRS requires you to have receipts and organized financial records. If you’re ever audited and you don’t have adequate records, your deductions might be disallowed, which can increase your tax liability. It’s also hard to track financial performance and manage cash flow with inadequate records.
How to Select the Best Startup Tax Services
There are various things to consider before settling on a tax service. Let’s discuss what to look for when choosing a tax service for your startup.
Education & qualifications
Ask any tax expert and all of them will confirm—it’s extremely difficult to deliver tax services without a qualification that includes taxation in the curriculum. There are plenty of complex concepts to understand and specific sections of the law to factor in when calculating a business’s tax liability.
For example, suppose you’re looking for funds and considering selling equity. At the other end of this transaction lies a tax liability, including capital gains tax and potential double taxation. A qualified tax consultant might suggest looking at non-dilutive funding options like revenue-based financing (RBF) for greater tax efficiency.
Qualified consultants are also future-proof. Their strong grasp of tax concepts helps them keep up with an evolving tax code. They’re also great allies when you’re dealing with an IRS or state audit. Always look for a tax professional with a relevant qualification and a thorough understanding of tax concepts.
Industry knowledge & experience
Tax laws vary significantly among industries. For example, a consultant specifically experienced working with B2B SaaS companies might be a better pick if you’re a B2B SaaS than a consultant who has experience mostly advising manufacturing companies. They’d understand the tax and accounting-related nuances of a B2B SaaS business.
For example, a tax professional working mostly with SaaS clients understands the intricacies of the applicable revenue recognition standards (ASC 606 and IFRS 15). This means they can have meaningful discussions with your accountant when necessary and help you achieve maximum tax efficiency.
Industry experience allows consultants to advise on tax-adjacent topics too. For example, if business is growing at a rapid speed and revenue is unpredictable, your advisor might suggest you consider a merchant cash advance to cover short-term liabilities like Medicare and federal unemployment taxes.
Referrals
Even when you find consultants via Google, what’s the first thing you look at? Their reviews. Social proof gives you confidence in the consultant’s skills. However, reviews from people you know and trust carry more weight than unknown people sharing their own reviews.
Ask people in your industry to refer you to a consultant with a proven track record and specialized knowledge. This gives you peace of mind and saves time you’d otherwise spend vetting through consultants.
Access non-dilutive funding for your startup
Non-dilutive funding can solve various tax challenges. Since you don’t need to sell equity to get funding, there’s no incidence of capital gains tax. In fact, startups can potentially claim charges paid towards RBF as deductions.
Estimated quarterly taxes and payroll taxes can drain your cash reserves when you’re a young company growing in double digits. RBF allows you to bring in cash without dilution to meet short-term obligations.
RBF also helps keep your tax reporting simple compared to financing options like equity or convertible debt since there’s no need to manage complex equity structures or track interest payments.
If you’re looking for easy, non-dilutive funding, learn more about Efficient Capital Labs. ECL provides capital in a fast, seamless, and cost-effective manner to SaaS Businesses. Startups can expect predictable repayments, which helps them manage their cash flow and ensures that they have the necessary funds available for tax payments–all while retaining full ownership and control.
With a 75%+ customer repeat rate, you can join over 100 global SaaS founders who have found success with ECL.
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