Tax Compliance Checklist for Startups

Tax Compliance Checklist for Startups

Complying with your obligations under state and federal laws often inspires stress in new small business owners. Startup tax compliance can be intimidating. Yet, by learning about your obligations early and establishing a clear and comprehensive recordkeeping system, compliance can become second nature over time.  

Create and Register Your Business

Depending on your business structure, you may need to register it with the state government where it is located. Generally, the following business structure types need to register with their respective secretary of state:

• Limited liability companies (LLCs)

• Limited liability partnerships

• C corporations

If you structure your business as a general or limited partnership or sole proprietorship, you typically do not need to register the entity. Regardless of structure, creating documents explaining how your business works is wise. Address its organization, how business ownership interests work, rules or bylaws, and any other issues that make sense for your company.

Get an Employer Identification Number (EIN)

Once you register your business (if required), request an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Your EIN serves as your company’s taxpayer identification number for filing taxes and authorizes you to hire employees.

Apply for Licenses

Depending on your state and what your business does, you may need to apply for one or more licenses before you begin operation. Some states require all businesses to obtain a general license, while others only require certain types to obtain licenses. Check with your state to determine which category you fall into.

Open a Business Bank Account

To stay on top of startup tax compliance, establish a bank account specifically and solely for your company. To avoid potential complications, do not intermingle personal funds, but use this account to deposit and withdraw business-related funds only.

Identify Your Employer Tax Obligations

As you get your business up and running, ensure you understand your specific employer tax obligations at the federal, state, and local levels. These obligations typically involve:

• Income or self-employment taxes

• Estimated taxes

• Payroll taxes

• Sales and use taxes

You may also need to pay excise taxes at the federal or state level.

Income and Self-Employment Taxes

Whether you need to pay self-employment taxes or your business needs to pay income taxes depends on its structure. Generally, C corporations are separate tax-paying entities, meaning they pay tax as a business structure separate from the owners. Then, after profits are paid to shareholders, those individuals pay tax again on their individual taxes. Other business entities do not pay taxes at the business level but pass income through to the individual owners, who pay tax on what they earn.

Self-employment taxes include:

• Social Security

• Medicare

• Income taxes

In both circumstances, you pay these obligations through regular estimated tax payments.

Employment and Payroll Taxes

If you hire employees, you must also pay employment and payroll taxes, which you generally withhold from employee paychecks. Those taxes cover income tax and the same general programs as self-employment taxes, including:

• Social Security

• Medicare

• Income

• Unemployment

Among these taxes, employers typically withhold all except unemployment, which the business, not the employee, pays. The business pays a portion of the employee’s Social Security and Medicare taxes. If you pay any employee a salary of $200,000 in a year, you must also withhold a 0.9% additional Medicare tax. You may also need to withhold similar state taxes. 

Sales and Use Taxes

Generally, you pay sales tax to the government where your customers are, not necessarily where you are. If you sell across state lines, learn about the many variations in sales taxes. You may be able to purchase software or hire assistance to comply with the many state and local sales tax variations.

Excise Taxes

The federal government imposes excise taxes on fuel, gas, and other transportation-related expenses. Some states also levy excise taxes, some on a much wider range of items, so it is crucial to look into your state’s laws.

State and Local Taxes

States often tax businesses, overlapping with the federal government in many ways, frequently including:

• Income

• Sales and use

• Excise

• Property

Your local government—city, county, or other municipal government—may also impose property and sales taxes. 

Information Returns

Businesses that engage in certain transactions during the year must also file information returns. These transactions often relate to lending funds, rent, royalties, and financial services, including issuing stocks and paying dividends. 

Additionally, regardless of what their business does, all partnerships file information returns every year. Partnerships use an information return to report income, deductions, and all other tax information for the partnership as an entity, separate from the individual partners. Forms K-1 are also issued to the individual partners reflecting their share of the partnership’s income, deductions, and credits.

Establish a Recordkeeping System

Establishing a thorough, detailed recordkeeping system is essential, with so many moving pieces to track. Your recordkeeping system should track your:

• Gross receipts for all sales

• Inventory

• Expenses

• Travel and other deductible expenses

• Payroll details

Taking the time to establish an effective and efficient system from the start generally proves worthwhile in the long term. 

Plan to keep most business records for at least three years and employment-related records for at least four years. You will need to produce those records if the government has questions or audits you.

Pay and File

One of the most significant business tax compliance obligations is paying estimated taxes, which you typically pay quarterly. Many other obligations are yearly. 

Estimated Taxes

When you have an employer, they withhold employment and income taxes from your paycheck. When you are an employer, you need to pay those withheld taxes directly, which you accomplish through estimated tax payments. If you qualify as self-employed, you also pay estimated taxes for that amount.

Usually, figuring out how much to pay in estimated taxes usually requires knowing the business’s expected:

• Gross and taxable income

• Tax bill

• Tax deductions and credits

Startups often lack data from previous years. Generally, overestimating how much income you will receive—so long as it does not tax too much cash out of your business—is safer than underestimating. If your estimate turns out to be high or low, you can recalculate with each quarter and adjust your payment accordingly.

Quarterly Obligations

You typically make estimated tax payments by:

• April 15 for income between January 1 and March 31

• June 15 for income between April 1 and May 31

• September 15 for income between June 1 and August 31

• January 15 of the next year for income between September 1 and December 31

Small employers—those with expected tax liabilities of $1,000 or less—can file an annual return instead.

Annual Obligations

Employers also have several obligations that are due annually on January 31, including:

• A federal (and probably state) unemployment tax return

• A W-2 for each employee

• A 1099 for each independent contractor

Individual owners also need to file personal tax returns before the usual April tax deadline.

Staying on Top of Your Business Tax Deadlines

Like running your business, startup tax compliance gets more straightforward with time. Establishing systems and structures to ensure you stay on top of your business tax deadlines, including seeking the assistance of professionals early on, sets your business up for short- and long-term success.

Small Business Tax Checklist

• Register Your Business

• Create Operating Documents

• Get an Employer Identification Number (EIN)

• Secure License(s)

• Open a Business Bank Account

• Identify Tax Obligations

  • Income/Self-Employment (Social Security and Medicare)

  • Employment (Social Security, Medicare, Income) and Unemployment

  • Sales and Use

  • Excise

• Establish a Recordkeeping System

• Pay Your Taxes and File Returns

  • Information Return(s)

  • Quarterly Obligations (Estimated Taxes)

    • April 15 (January 1 through March 31)

    • June 15 (April 1 through May 31)

    • September 15 (June 1 through August 31)

    • January 15 (September 1 through December 31)

  • Annual Obligations

    • Unemployment Return(s)

    • W-2s

    • 1099s

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Resources:

IRS, Business Taxes, link.

IRS, Employment Taxes, link.

IRS, Employment Tax Due Dates, link. 

IRS, Estimated Taxes, link.

IRS, A Guide to Information Returns, link.

IRS, How Long Should I Keep Records?, link.

IRS, Pay As You Go, So You Won’t Owe: A Guide To Withholding, Estimated Taxes and Ways to Avoid the Estimated Tax Penalty, link.

IRS, Publication 510 (03/2023), Excise Taxes, link.

IRS, Publication 583 (12/2024), Starting a Business and Keeping Records, link.

IRS, Recordkeeping, link.

IRS, Reporting Payments To Independent Contractors, link.

IRS, Starting a Business, link.

IRS, Tax Information for Partnerships, link.

IRS, Understanding Employment Taxes, link.

IRS, What Kind of Records Should I Keep?  link.