When launching a startup, you need to accept that it will be necessary to pay taxes on your profits. Taxes vary from country to country. It is difficult to discuss the tax systems of the whole world, so we chose the USA as an example. It is the largest startup market, and some taxes similar to the American ones can be also encountered in other countries. Read about startup taxes you will need to pay.
4 startup taxes you need to pay – table of contents:
- Income tax
- Federal income tax
- State income tax
- Franchise tax
- Other startup taxes
- Tax forms to use
- Common startup tax mistakes
Income tax is known in most countries and covers both individuals and companies (including startups). In the case of a company, such tax will be paid on payments received from the sale of products and services, but also on income from other sources. What is considered taxable income? Taxable income is the amount of income subject to tax, after deductions and exemptions. A company’s gross income is the revenue from all sources minus the firm’s cost of goods sold.
Federal income tax
If a startup operates as a corporation in the United States, it is subject to federal income tax. It does not matter whether the corporation made a profit or not, it is necessary to send an annual tax return. It must be sent by no later than the 15th day of the fourth month after the end of the fiscal year (April 15). All federal income taxes due must also be paid by the same date.
State income tax
In the case of the USA, you need to be aware that each state has its own tax system. Therefore, you will not usually avoid paying state income tax as well, which in turn also means that you have to send state annual tax returns. Unfortunately, in this case you will often need the support of an experienced tax advisor. There are some states where no state income tax is charged, but these are exceptions to the rule.
Tax laws in the United States vary from state to state. As a result, you can choose to base your startup in a place where your taxes will be lower. However, it is worth noting that some states require startups to pay an annual franchise tax. If you have registered a company in a state where such a tax applies, you will have to pay it. This is the case in Delaware, for example, where the minimum annual franchise tax is $400 and you pay an additional $50 for filing an annual report.
Other startup taxes
The above list, of course,could be extended. Depending on the type of activity of your startup and its headquarters, the company may be obliged to pay other taxes as well. It is best to consult a tax advisor with extensive experience before you decide to launch your startup.
Tax forms to use
Each state and local government may have its own tax forms. Therefore, it is necessary to get information regarding the required documentation from the local tax authority. Again, it’s useful to consult a tax advisor who will not only explain the intricacies of tax law, but also tell you what forms are needed to file with the IRS. If your startup is structured as a corporation, then you must file a tax return on tax form 1120.
Common startup tax mistakes
Tax issues are not easy for many entrepreneurs.The biggest problem is that budding entrepreneurs often don’t keep close track of their expenses, and expenses do, after all, affect income tax. Income after deducting expenses is net income, which is subject to federal tax.
Some startups also fail to charge all state taxes. On top of that, they sometimes confuse sales tax with income tax. Not all startups reliably document tax deductible costs, as the IRS demands. These are, of course, just some of the tax mistakes that usually appear, but these can have the biggest legal consequences.
Startup taxes – summary
Most startups are subject to certain taxes. They need to be settled on time, as a failure to do it can cause trouble – from penalties by the IRS, to problems with attracting investors, to delaying the launch on the stock market. Every startup founder should keep this in mind.
You’ve just read about startup taxes you need to pay if you run a young business. Read also: 7 startup roles explained.
Launch your startup:
- What is a startup?
- Pros and cons of creating a startup
- 8 best industries for startups
- Top 5 skills every highly successful startup founder needs
- How to create a startup? 7 simple and easy steps
- 6 essential startup development stages
- How to create a startup growth strategy?
- General startup statistics you need to know
- Startup vs. corporate job. Which is right for you?
- 5 incredible companies that started in a garage
- How to find a business idea?
- How to check if your startup idea already exists?
- How to name a startup? Useful tips and strategies
- How to gain business knowledge quickly? 5 best practices
- Why do startups fail? 6 startup ideas you should avoid
- 5 absurd startup ideas that made money
- Top 6 most profitable small businesses
- 7 questions to determine if your business idea is worth pursuing
- What is a buyer persona? 5 benefits of creating a buyer persona
- How to validate your business idea? 3 easy steps
- Should you follow your passion? The importance of passion in business
- What is market reseach and why is it important?
- Using social media in business
- What to do when you have too many business ideas?
- How to write a good problem statement for your startup?
- How to test your business idea for real?
- How to create a prototype for a product?
- How to build an MVP?
- How to use surveys for testing your business idea?
- 10 useful tools to validate your business idea
- What is a business plan? 4 types of business plans
- What should be included in a business plan?
- What should a product description include?
- Competitor analysis
- Marketing strategy
- Traditional business plan vs. lean startup plan
- Implementation plan. What is it and how to create it?
- Everything you need to know about patents
- Financial management for startups
- What permits and licenses does my startup need?
- What is the average startup founder salary?
- 4 startup taxes you need to pay
- Which legal structure is best for your business?
- Startup costs. How much money will you need?
- Protection of intellectual property in a startup
- Family funding vs. self-funding
- What is a shareholders’ agreement?
- What should a financial section of a business plan include?