Intro
Startups move fast, but when it comes to taxes and compliance, even small oversights can snowball into big problems. Here are six common tax landmines founders should watch out for—and how to steer clear.
The List
1️⃣ Misclassifying Employees as Contractors
It might be tempting to treat workers as independent contractors to save on payroll taxes, but if someone functions like an employee, the IRS expects them to be treated as one. Misclassification can lead to audits and hefty penalties. Learn about the IRS “right to control” test here.
2️⃣ Missing Out on R&D Tax Credits
Many early-stage companies qualify for valuable R&D credits but either don’t claim them or lack the documentation to back them up. Click here to see if you qualify.
3️⃣ Overlooking State Nexus Rules
Hiring remotely or operating in multiple states can unknowingly trigger “nexus,” creating tax obligations like income, sales, or franchise taxes in states you didn’t expect. Using a PEO can help—but it’s no silver bullet. Stay proactive about where and how you’re doing business.
4️⃣ Mishandling Sales Tax for SaaS
Sales tax isn’t just for physical goods—and SaaS is taxed differently in each state. Startups often assume they’re exempt, only to get blindsided by back taxes. In many states, tax applies where the software is used—not just where your company is located.
5️⃣ Ignoring the 83(b) Election
If you’re issuing restricted stock, filing an 83(b) election within 30 days is critical. Miss that window, and founders or early employees could owe massive taxes when equity vests or is sold later on.
6️⃣ Fringe Benefits Without Proper Reporting
Offering creative perks—like stipends, equity, or even vehicle use—can help attract talent. But if not properly reported and taxed through payroll, those extras can become a compliance nightmare under audit.
Bottom Line
Move fast, but don’t skip the financial details. Solid tax planning can save your startup money, headaches, and surprises down the road.
