Requirements
Overview of taxes and compliance requirements for early-stage startups.
Overview
When you incorporate, tax filings kick in at the federal, state, and sometimes local level.
This guide breaks down the key taxes early-stage startups need to know, who charges them, who handles the filing, and what actions can lead to new filing requirements. You’ll also learn about common oversights founders make so you can stay ahead from day one.
Tax Types
Franchise Tax
This is a fee you pay to keep your company registered in the state where you incorporated or operate. Some states charge a flat minimum that can increase based on your company’s revenue, assets, or number of authorized shares. Others calculate the full amount based on those factors from the start but still include a minimum fee. If you use Finta, we’ll take care of this for you.
Example: If you incorporated in Delaware, you have to file the Annual Report and pay franchise taxes.
Income Tax
This is a tax on your company’s net income (also known as “corporate tax”) and applies at the federal level and in most states where your business has a presence (see Understanding Nexus below). There are two steps:
- File your income tax return (Form 1120) — this is required every year, even if you had no revenue.
- Pay taxes owed — only if your company made a profit.
Your tax preparer or Finta will handle filing the income tax return and making any required payments for you.
Example: If your company has Nexus in California, you must file income taxes with both the IRS and the State of California. Some states, like Washington, don’t have income tax filing requirements because they don’t charge it.
Payroll Tax
You’re required to start payroll tax filings as soon as you hire a W-2 employee. That includes withholding taxes from their paycheck and paying your share of employment taxes. Your payroll provider will handle registration, calculations, and filings for you.
Example: When you hire your first full-time employee, your payroll provider holds back the correct tax amount, makes payments to the correct agencies, and files payroll taxes (Form 941) for you every quarter.
Gross Receipts Tax
This is a tax on your company’s total revenue (not profit), and it applies in certain states and cities. Each place has its own thresholds, rates, and filing rules. Your tax preparer or Finta will handle this filing for you.
Example: If your company made $2M in revenue and operated in San Francisco, you’d likely need to file a gross receipts tax return and pay tax on the full amount, even if you didn’t make a profit.
Sales Tax
This tax applies to most things your company sells, like services (including SaaS), digital products, and physical goods. Once your sales in a state pass a certain threshold, usually based on your revenue or number of transactions, you must register for a sales tax permit and begin filing returns. You’ll need a sales tax-specific provider like TaxJar (now part of Stripe), Avalara, Anrok, and Numeral to calculate, collect, and file based on where your customers are.
Example: If your business makes more than $500,000 in sales from customers in California, you’re required to register for sales tax in that state, potentially collect it from California customers, and file returns.
Property Tax
This tax applies only if your company owns a building or has more than $100,000 in furniture. If you lease office space or rent a co-working desk, this doesn’t apply to you. In other words, 99.9% of startups don’t need to worry about property tax.
Tax Jurisdictions
With different types of taxes, you also can be taxed at multiple jurisdictions:
- Federal (IRS)
- State
- Local (county or city)
- International (other countries)
Each jurisdiction has its own forms, deadlines, and rules to follow.
| Type | Jurisdiction |
|---|---|
| Franchise Tax | State |
| Income Tax | Federal, State, Local |
| Payroll Tax | Federal, State, Local |
| Gross Receipts Tax | State, some local |
| Sales Tax | State, local |
| Property Tax | Local |
Understanding Nexus
Nexus means you have a strong enough presence in a state that it triggers filing and tax obligations there. This mostly affects franchise, income, and sales tax.
You likely have nexus in a state if any of the following is true:
- You have salaried employees working there
- You have a physical office or are headquartered there
- You cross economic thresholds set by the state (e.g. sales or transaction count)
- You store inventory (even via a third-party warehouse)
Each state defines a nexus slightly differently. If you think you’ve triggered it, confirm with your tax advisor, then register and file as required.
Common Oversights
Filing requirements start at incorporation
If your company is incorporated, even on December 31, you have to file that year’s taxes with the IRS and states where you have Nexus.
You must file tax returns even if you had no revenue, no expenses, or no business activity.
You’re still obligated to file the tax return despite owing no taxes. Otherwise, these government agencies will typically assume you owed something and mail you notices with an unreasonable penalty that accrues interest.
Missing state registration
Once you hire an employee, generate revenue, or take any action that creates Nexus in a new state, you need to register your company with that state. If you skip this step, your tax filings may not be accepted, you could miss key deadlines, and penalties and interest can add up quickly.