Introduction:
As an entrepreneur who has recently started or is planning to start a business in the United States, understanding your responsibilities, particularly regarding taxation, is crucial. Income Tax compliance is essential for tax adherence, ensuring your Startup operates smoothly without incurring unnecessary fines. This blog will guide you through the fundamental steps and forms required for tax compliance, providing insights into estimated tax payments, the basic rules of employment tax issues, and the most common tax credits and deductions. We’ll cover federal and state law perspectives, helping you navigate your Startup’s essential tax compliance requirements.
Entity Structure for Income Tax Compliance:
Select the entity type that suits your business and jurisdiction as a first step.
- C Corporation: A legal entity separate from its owners, subject to corporate tax rates and offering limited liability protection.
- Partnership: A business structure where two or more individuals share ownership and responsibilities, with income and losses passed through to personal tax returns.
- S Corporation: This is a type of corporation that allows income to pass through to shareholders’ personal tax returns, avoiding double taxation. Foreign founders cannot opt for an S Corporation.
- Sole Proprietorship: A business owned and operated by a single individual, where income and expenses are reported on the owner’s tax return.
Federal Income Taxes for US Startups:
Annual Tax returns based on the type of entity
| Tax Form | Federal Tax Rate | Due Date |
| 1120 – C Corp | 21 % | April 15 (6 months extension available) |
| 1065 – Partnership | No entity level taxes. Partner’s share of income to be included at the Individual tax return | March 15 (6 months extension available) |
| 1120 – S Corp | No corporate income tax, shareholders should include their share of income in their individual return | March 15 (6 months Extension available) |
| 1040 – Sole Proprietorship | Marginal tax rate | April 15 (6 months extension available) |
State Taxes:
The entity may need to file annual franchise taxes/business renewal in the state of incorporation.
For example, Delaware requires an annual franchise tax by March 1, with a minimum payment of $450 for a C Corporation. Likewise, each state requires a yearly fee and filing to maintain the entity’s active status.
Employer Identification Number (EIN):
An employer identification number is a unique number issued to any business entity attempting to manage records, especially for fulfilling IRS tax obligations. Like any other business, the first step is to register your business, and in the process of registering, you apply for an EIN. This is mainly used in the incorporation of business bank accounts, obtaining business licenses and permits, and, most importantly, during the preparation of annual tax returns. To apply for an EIN, you have to do so online at the United States of America’s Internal Revenue Service website.
Employment Taxes and Forms:
If your Startup has employees, it must comply with payroll tax compliance, which requires deducting and paying federal income tax, social security, and Medicare taxes. If you opt for payroll, additional cash outflow for payroll taxes and compliance must be considered. You can compensate US service providers either through Payroll (Form W-2 wages) or as Contractors (Form 1099).
- FICA Taxes: Employers must contribute 6.2% for Social Security and 0.9% for Medicare taxes on top of the gross salary.
- Form 941: This form is calculated and filed quarterly. It covers income taxes, Social Security, and Medicare taxes withheld by an employer from employees.
- Form 940 is used to report Federal Unemployment Tax Act (FUTA) taxes, which support State Unemployment Tax Act (SUTA) taxes.
- W-2 Forms: These forms, delivered to each employee at least once per year, contain information about wages paid and taxes withheld.
- Contractors: No withholding is required for US contractors.
Estimated Tax Payments:
Other specialists and new business entities that fall under sole proprietorship, partnerships, and S corporations may be required to pay estimated tax payments to avoid underpayment penalties. These businesses are expected to pay their quarterly taxes if their estimated taxes will be $1,000 or more. You can use Form 1040-ES to work out and remit these IRS-estimated tax payments. Quarterly tax payments are also effective for cash flow planning because you do not have to fulfill your obligation at one time for the entire year.
State-Specific Tax Compliance:
Every Startup has federal tax responsibilities, but it also has to meet state tax expectations in some cases. This usually includes state tax identification numbers and state income tax returns with state employment taxes as well. Every state is different, which means you need to use professional help from tax compliance services to discover all the requirements unique to your Startup.
Sales and Use Tax Compliance:
Sales tax is another crucial consideration, especially for startups selling goods or services. Sales tax must be charged and paid to the state on behalf of customers. This will require the business to get a sales tax permit and file regular tax returns. Some also have use tax regulations that deal with items bought from other states but used in a particular state.
It is recommended that this be done with the help of sales tax compliance services so that the business of an individual or a company will follow these rules. The good news is that everyday sales tax compliance responsibilities can be effectively managed with the help of corresponding services, which can protect against mistakes and their subsequent financial consequences.
Penalties and Consequences for Non-Compliance:
Consequences of tax non-compliance entail monetary fines, interest on unpaid taxes, and possible legal actions. Regarding overseas accounts, failure to observe FATCA rules results in another penalty for business organizations. To avoid these mistakes, it is essential to be updated on the changes and hire professional tax compliance services. To avoid penalties and audits, small businesses must file accurate and complete information on their 1120 tax form by March 15, or you can extend it up to 6 months.
Conclusion:
Managing income tax compliance for US startups is a challenging but essential task. There are also the necessary forms that should be known and filled in on time, estimated tax payments, state-specific compliance that must be complied with, and available tax-deductible rules that will help startups be tax-compliant and not distract from growth. Professional services for sales tax compliance and payroll tax compliance can also help make it easier for you to focus on growing your business.
Non-compliance from the start can cause penalties, but, more importantly, for your business’s financial health, non-compliance from the beginning is a recipe for disaster. To do so, one must be sure; for that, engaging tax consultants who will be more willing to assist and guide the new entrant in line with their needs is always advisable.
FAQs:
1. What forms must C Corporations file for income tax compliance?
C Corporations must file Form 1120, which is used to report income, gains, losses, deductions, and credits. This form must be filed annually with the IRS.
2. Which form do Partnerships use to report their income?
Partnerships are required to file Form 1065. This form reports the partnership’s income, but the partners pay the actual tax on their individual tax returns.
3. What is the purpose of Form 1120-S for S Corporations?
S Corporations use Form 1120-S to report income, gains, losses, deductions, and credits. The income reported on this form is passed to shareholders, who then report it on their tax returns.
4. What are the categories Tranquility Consulting supports for startups regarding income tax compliance?
Our team has significant public and private tax experience in sectors such as technology, media, online retail, healthcare, and many others. We do not just run taxes but offer value-added strategies that can be administered for business solutions. Based on the analysis of the current tax laws and rules as well as other guidance documents, we establish whether the particular Startup complies with all the steps in the process.
5. What are the consequences of failing to comply with income tax regulations for startups?
Failure to comply with income tax regulations can result in severe penalties and interest charges. This includes penalties for late filings, underpayment of taxes, and non-compliance with various tax requirements, such as those mandated by FATCA. Startups must understand and meet all tax obligations to avoid these penalties.
If you have any questions or need business-related tax consulting advice, please contact us at: [email protected]
