This guide covers the most important things startup founders need to know about tax season, including deadlines, filing requirements, and ways to get cash back from the IRS.
Once your startup is incorporated as a Delaware C Corporation, you will need to file corporate taxes — even if you have no financial activity during the year. That means that you are required to file corporate taxes for every year your company exists, beginning with the year of incorporation.
The good news is that you can automate all of this for a small cost by using Fondo, we can make sure you get an ROI on this by helping you get cash back from the IRS (the average startup gets $21k back).
All Delaware C Corporations are required to pay and file Delaware Franchise Tax whether or not the company has any income, expenses, or financial activity.
All U.S. Corporations are required to file a Corporate Income Tax Return (form 1120) whether or not the company has any income, expenses, or financial activity.
If you are “doing business” in any states (i.e. have W-2 employees — not 1099 contractors or consultants, an office, fixed assets, or sales — typical state-specified threshold is $100,000) you will have to file and pay State Corporate Income Tax in that state.
If you paid $600 or more to a U.S. based contractor, consultant, agency, or law firm, you will need to file a 1099-NEC with the IRS for each one as well as send each vendor their 1099-NEC. Please note, if these vendors are structured as a Corporation you do not need to file a 1099-NEC for them. If you have foreign contractors who are not based in the U.S., then you don't need to send them a form 1099-NEC. If you paid a landlord, who is not a corporation, $600 or more the company will need to file a 1099-MISC with the IRS for each one as well as send each landlord their 1099-MISC.If you paid any of these vendors through Rippling, Gusto or another payroll provider, they will likely take care of these filings for you.
Delaware looks at total share counts and gross assets (i.e. Cash, Treasury Accounts & other investments, Fixed Assets like machinery & equipment, Crypto, Inventory, Investments or Loans to Foreign or Domestic Subsidiaries) to determine the amount of Franchise Tax you owe. There are two methods to calculate the total Delaware Franchise Tax: the Authorized Shares Method and Assumed Par Value Capital Method. Delaware gives startups the flexibility to use the method that results in the lesser tax -- in most cases this will be Assumed Par Value Capital Method. The minimum due is $450.00 (Guide to Delaware Franchise Tax for Startups)
The current U.S. corporate tax rate is 21%. The corporate tax rate applies to your startup’s taxable income, which is essentially your revenue minus expenses. If your startups doesn’t have taxable income (i.e. profits), you will owe $0.
If you have $200,000 in taxable income you will owe $42,000 — however if you work with Fondo we can help make this $0 or even help you get a refund from the IRS (average startup’s we help owe $0 and will get $21,000 back from the IRS).
Most states set a corporate tax rate in addition to the U.S. rate. State corporate income tax rates range from 0% – 9.99%. But, not all states have a corporate tax rate.
The following states do not have a state corporate tax rate: Nevada, Ohio, South Dakota, Texas, Washington, Wyoming.
Nevada, Ohio, Texas, and Washington have gross receipts tax on corporations instead of corporate taxes. A gross receipts tax is a tax on a startup’s gross receipts, which includes the startups’s total revenue WITHOUT deductions (i.e. operating expenses).
South Dakota and Wyoming do not have state corporate income taxes at all.
Keep in mind that some states have both corporate income tax and gross receipts tax.
Some states apply a flat tax to all corporations while others use brackets. Some states have a minimum Franchise Tax due (i.e. California has a minimum Franchise Tax of $800). The states with brackets apply tax rates based on the corporation’s taxable income — Alabama: 6.5%; Alaska: 0% – 9.4%; Arizona: 4.9%; Arkansas: 1% – 5.9%; California: 8.84%; Colorado: 4.63%; Connecticut: 7.5%; D.C.: 8.25%; Delaware: 8.7%; Florida: 5.5%; Georgia: 5.75%; Hawaii: 4.4% – 6.4%; Idaho: 6.5%; Illinois: 7% (+2.5% replacement tax); Indiana: 4.9%; Iowa: 5.5% – 9.8%; Kansas: 4% (+ a 3% surtax on net income in excess of $50,000); Kentucky: 4% – 6%; Louisiana: 3.5% – 7.5%; Maine: 3.5% – 8.93%; Maryland: 8.25%; Massachusetts: 8%; Michigan: 6%; Minnesota: 9.8%; Mississippi: 3% – 5%; Missouri: 4%; Montana: 6.75%; Nebraska: 5.58% (+7.50% on taxable income of the excess over $100,000); Nevada: N/A; New Hampshire: 7.7%; New Jersey: 6.5% – 9%; New Mexico: 4.8% (+5.9% of excess over $500,000); New York: 6.5% – 7.25%; North Carolina: 2.5%; North Dakota: 1.41% – 2.9%; Ohio: N/A; Oklahoma: 4%; Oregon: 6.6% – 7.6%; Pennsylvania: 9.99%; Rhode Island: 7%; South Carolina: 5%; South Dakota: N/A; Tennessee: 6.5%. Texas: N/A; Utah: 5%; Vermont: 6% – 8.5%; Virginia: 6%; Washington: N/A; West Virginia: 6.5%; Wisconsin: 7.9%; Wyoming: N/A.
$0. These are informational filings and you will not owe any taxes with these filings.
The government offers many Tax Credits to help startups offset research and development costs, hiring employees, and more. Most startups don't know that certain credits offer direct cash back from the IRS — even if the company does not have any profits or owe any income taxes. The average startup we help gets $21,000 back from the IRS. This guide discusses the most beneficial tax credits for startups, how to qualify, and how to claim them. To see if you qualify and how much you can get back see here.
Your Delaware Annual Franchise Tax Report and payment is due by March 1.
Your U.S. Corporate Income Tax Return (form 1120) is due by April 15. You can file an extension which will extend your deadline by 6 months — to October 15. However, you will need to pay any taxes owed with your extension. Your R&D Tax Credit forms are due with this filing. In order to qualify for R&D Tax Credits (payroll election), you cannot miss this deadline.
Your State Corporate Income Tax Return(s) are typically due by April 15. You can file an extension which will extend your deadline by 6 months — to October 15. However, you will need to pay any taxes owed with your extension.
Your 1099 filings are due to your vendors and the IRS by January 31.
The penalty for paying and filing a late Delaware Annual Franchise Tax Report is $200 + 1.5% per month on your outstanding balance due.
5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax.
Varies by state, typically up to 5% of the unpaid tax for each month or part of a month the return is late
The amount of the penalty is based on how late the filing is and how many 1099's are filed late and the size of your business. A "small business" is any business with gross receipts of $5 million or less. A large business is any business with more than $5 million in gross receipts during the tax year. The penalty for filing form 1099 less than 30 days late is $50 per form with a maximum penalty of $194,500 for small businesses and $556,500 for large businesses. The penalty if you send in a form 1099 and file more than 30 days after the deadline but by August 1st is $110 per form with a maximum penalty of $556,500 for small businesses and $1,669,500 for large businesses.
There's a lot that startups need to do to prepare for tax season, but it boils down to a few key items.
First, you need to make sure that you have all of your financials in order:
- Profit & Loss Statement
- Balance Sheet
- General Ledger
- Trial Balance
Additionally, you need to be aware of any changes in the tax code that could affect your business.
Finally, it's always a good idea to work with a professional to ensure that you're doing the minimum required and taking advantage of all the deductions and credits available to your startup. Fondo is an all-in-one accounting platform with financial experts to get your bookkeeping done, taxes filed, and cash back from the IRS. We’d love to take all of this off your plate!
Add these tax deadlines to your calendar here: http://cal.ae/ieesdgw
There are a lot of deadlines and requirements for tax season, but don't let that intimidate you. Simply being aware of the deadlines and what's required will put you ahead of most startups. And if you need help, Fondo is always here to assist you with your bookkeeping, taxes, and getting cash back from the IRS. Get an instant quote here.
This guide for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.