Summary
- This article describes a few key tax filings that apply to most startups in the United States. It is meant to help founders cut through the noise and understand which deadlines they need to care about, as well as how they can prepare for those deadlines. It is not all-encompassing and may not address certain filings that apply to your business.
- Our #1 tax tip for founders is: don’t be a hero and try to do your taxes yourself. It’s a bad use of your time, and the risk (jail!) far outweighs the reward (saving a couple grand).
- Working with a provider like OpStart is the easiest and safest way to handle all of your company’s tax needs.
Introduction
Let’s face it, taxes are a necessary evil for businesses. For startup founders, they often cause excessive stress and serve as a distraction — after all, it’s easy to miss a deadline, lose out on a credit, or fail to take a deduction. You’re a CEO, not a CPA!
Your startup’s taxes don’t have to be this difficult – here we’ll walk you through everything you need to know about your startup’s 2023 taxes, so you’re as prepared and informed as possible. We’ll also do our best to avoid the dense accounting verbiage you’ll find on the IRS website, but no promises.
The article below is meant to provide basic knowledge and actionable tips for startup founders. It is not comprehensive tax advice and should not be viewed as such — please talk to an accountant and do more research before applying this knowledge to your own business. The best advice we can really give founders is to work with a good accounting firm (like OpStart) that handles all your tax needs.
What Taxes Does My Startup Need To File?
Federal & State Income Taxes
Due April 15th, 2024 (for C-corps) or March 15th (for S-corps)
All businesses need to file income taxes every year. This is one of the few universal filings every founder, owner, and operator must have on their radar. If your business existed for any part of the last year, you must file income taxes — even if you weren’t profitable, incorporated the last week of December, or had no financial activity at all during the year.
These filings are due April 15th for C-corps and March 15 for S-corps, though you can easily file an extension to delay the deadline by six months. Filing an extension generally has little downside, and many providers do it automatically to ensure there is no looming deadline pressure. One exception: if you are providing K-1s to investors (see below), you may want to avoid filing an extension since your investors need these forms for their personal tax returns. Also, it is important to know that an extension only extends the filing of the return; you must still pay the estimated tax due prior to the original deadline to avoid any penalties and interest.
In addition to the federal income tax filing (due for all US companies), you will likely have to file income taxes in one or more states. The rules vary by state, but generally, if you have employees based in the state and/or generate real revenue there, you might have to file income taxes there too. Your accountant can help you determine which states you need to file in, and you generally file state income taxes at the same time as federal (so there are no additional deadlines to worry about).
Besides accurate financial records for the period, you will also want to be sure to take advantage of any available deductions and credits. To file accurate income taxes that maximize your benefits and minimize your liability, the best recommendation we can give you is to work with an accountant/CPA. The benefits of hiring an expert to handle your income taxes are much greater than the cost of that expert.
To choose the right expert, find a firm that works with other businesses like yours. Single member LLCs need different advice than venture-backed tech startups, so don’t think all CPAs are created equal. A bonus tip for founders: try to work with the same provider (like OpStart) for both bookkeeping and taxes so you don’t have to coordinate between parties.
K-1s
Due alongside income taxes for certain entities
LLCs, S-Corps, and partnerships must file K-1s along with their income taxes. These are pass-through entities, where the profits or losses from the corporation flow through to owners/investors. K-1s are the tax documents those individual owners/investors need to file with their personal returns. Your accountant will probably prepare these forms when they prepare the rest of your income tax return.
If you are a C-corp (like most venture-backed startups), your investors do not need K-1s. Many individual angel investors are unaware of this and will ask you for K-1s at year-end, which gives you a good opportunity to look smart and let them know they don’t need one for your business.
1099s
Effectively due January 31st. At least that’s the deadline you should care about.
1099 forms are used to report compensation you paid to independent contractors, service providers, and certain vendors (like law firms and rental property owners). You have to prepare a 1099 for each qualifying contractor or vendor and send it to them by January 31, then file copies with the IRS by the end of February.
The threshold for 1099s is generally $600, so if you paid any of these parties more than $600 last year, they probably need a 1099:
- Independent contractors (individuals who did work for your business last year but were not actually employees)
- Service providers (similar to independent contractors, but they have LLCs)
- Lawyers
- Rental property owners
- Certain investors who received interest or dividend payments from your company during the year
You don’t need to worry about 1099s for SaaS vendors, suppliers, and most large corporations regardless of how much you paid them. If you’re unsure of whether a vendor might need a 1099, request and review their Form W-9
There are a number of different 1099 forms that apply to different types of payments, but they all have the same deadline (January 31) and require similar information to complete. As a founder, the most helpful thing you can do is collect a W9 from every vendor and track your expenses in a very clear, consistent manner. Your accountant can help you determine which parties need to receive a 1099, as well as what type of 1099 they should receive.
You can simplify your 1099s by paying contractors and vendors through software platforms like Gusto, bill.com, PayPal, and Venmo. These systems will usually prepare 1099s automatically for anyone who received more than $600, but you should certainly double check to ensure this is the case. Also, be aware that if you pay the same parties through different systems over the course of a year, you cannot rely on auto-generated 1099s — they will only count payments made through their own system, not others.
Late filings will incur additional fees, but those are lower than the fees for non-compliance.
Form 3921
Effectively due January 31st. At least that’s the deadline you should care about.
If you give equity to employees in the form of ISOs, you should have form 3921 on your radar. Any employees who exercised ISOs last year should receive a 3921 by January 31, and (like 1099s) you have to file copies with the IRS a month later. This is only required when shares are exercised, not when they are granted, so it often applies when employees leave the company (not when they join).
It’s best to have your accountant help with this. Carta and other cap table software providers can assist as well if the exercises happen through their platform.
Delaware Franchise Taxes
Due at the end of February for Delaware corporations.
A franchise tax is an annual fee charged by certain states for the right to exist as a legal entity and to do business within the state. There are numerous franchise taxes and similar “check-the-box” filings that are required by individual states and cities. However, we will focus on one specific state that is an exceedingly popular place to incorporate a business: Delaware.
The Delaware Franchise Tax filing is due by the end of February each year. To assure accuracy and minimize any chance of overpayment, we recommend letting your accountant or registered agent handle the filing it for you. The information you need for this filing comes from your cap table and/or balance sheet as of year-end, so it’s wise to have that information ready before February begins.
For most startups, this tax ends up being an annual fee of $450 for their first several years. If you try to file yourself and are told you owe any more than $450, talk to an accountant or lawyer before paying! We often see founders make simple mistakes trying to complete their own filings online, and simple mistakes can lead to wildly high (and incorrect) tax bills.
If you are not incorporated in Delaware, be sure to talk to your accountant to assure any other franchise tax or similar filings that pertain to your business are fully covered.
R&D Tax Credits
Due alongside your income taxes
Research and development (R&D) tax credits can create massive savings for companies who qualify (including most tech and life sciences startups). The average OpStart client who qualified for and pursued this credit saved >$50,000 through R&D credits last year alone. You can review this simple questionnaire to determine whether you are eligible.
To qualify for the R&D tax credit, your company must engage in “R&D activities” – i.e., building software or tech products, developing a new drug, etc. Only domestic R&D expenses will count towards your credit, so you can’t get any money back on offshore development costs. But you can include time from founders, product managers, designers, and anyone else who participates in the R&D process in some capacity. A good accountant will help you identify qualifying expenses and calculate the savings you can realize through this credit.
Startups who are not yet profitable can often use this credit to offset payroll taxes, which are typically paid automatically by your payroll provider throughout the year. Your business must check two boxes in order to use an R&D credit against payroll tax bills:
- You reported less than $5 million in “gross receipts” (revenue plus income from interest and capital gains) on your income tax filing
- You have been generating revenue for less than 5 years
If you don’t meet the above criteria, you can still carry this credit forward for up to 20 years and use it on a future income tax bill. If your business is profitable today, you can ignore all of this and simply use the credit to offset your current income tax obligations.
You definitely want to work with an experienced accountant for your R&D credit filing, as the IRS is known to scrutinize these credit claims in audits down the road. It’s easiest (but not essential) to use the same accounting firm for your income taxes and R&D credits, as they’re filed together. Most providers (including OpStart) charge a percentage of the credit value rather than a flat fee, so there should be no real risk to pursuing this option.
Sales Tax
Due throughout the year, often monthly.
Sales taxes can be complex and burdensome to manage. Each state has different rules around when you start to owe them, how much you owe, which products are taxed, etc.
The first thing you should do when it comes to sales taxes is to figure out whether the product you’re selling is taxable. Most products are (including SaaS), but certain services (like accounting and legal fees) do not incur sales tax. Additionally, you should track which states you sell products/services in, including the amount sold in each state and when you first began selling in the state.
Software platforms like Avalara, TaxJar, and TaxValet will plug into your checkout systems and accounting software to automate the sales tax process. You should absolutely install one of them once you can afford to do so. To get started, ask your accountant to help you file registrations in each applicable state and complete any initial or overdue filings before the software puts things on autopilot.
Conclusion
Hopefully, you now have a better idea of the tax filings that apply to your startup. However, each business is unique and you really shouldn’t try to “DIY” your taxes using generic advice from this article or others you can find online.
The best advice we can give is to work with a provider like OpStart who specializes in startups and supports your business year-round. This will massively limit both your downside risk and your stress during tax season. Not all accountants are created equal, so be wary of CPAs who offer cheap income tax services but care little about the other deadlines and credits that may apply throughout the year.
