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:

  1. Income tax
  2. Federal income tax
  3. State income tax
  4. Franchise tax
  5. Other startup taxes
  6. Tax forms to use
  7. Common startup tax mistakes
  8. Summary

Income tax

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.

Franchise tax

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.

startup taxes

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.

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Author: Andy Nichols

A problem solver with 5 different degrees and endless reserves of motivation. This makes him a perfect Business Owner & Manager. When searching for employees and partners, openness and curiosity of the world are qualities he values the most.

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