What taxes is my startup supposed to pay?
Income tax is a tax on the payments a startup receives from the sale of goods or services or from other sources of income. You can calculate your startup's taxable income by subtracting deductions from gross income.
Taxable Income = Gross Income - Deductions
- Gross Income: receipts and gains from all sources of income, before any deductions
- Deductions: any item or expenditure subtracted from gross income to reduce the amount of taxable income
Example: Last year, Acme, Inc. sold $1,000,000 of widgets, paid $500,000 in employee wages, and had no other income or applicable deductions. Therefore, Acme, Inc.'s taxable income for the previous year is $500,000 ($1,000,000 - $500,000).
Federal Income Tax
Every U.S. corporation must file an annual federal income tax return, even if the corporation has no profits, sales, or other business activities.
All C corporations must file Form 1120, U.S. Corporation Income Tax Return. Startups incorporated on Clerky are C corporations by default.
A corporation must file its annual federal income tax return and pay its federal income taxes by the 15th day of the 4th month after the end of its tax year. Most startups have a tax year end of December 31. This means that, for most startups, taxes are due April 15.
State Income Tax
Many states in the U.S. require annual income tax filings, depending on a startup’s activities in the state. A state income tax filing is separate from a federal income tax filing.
Some states in the U.S. require startups to pay an annual franchise tax. Companies pay the franchise tax, sometimes called a privilege tax, for the right to exist as a legal entity in a certain state and do business there. Just as a franchise like Subway collects fees from franchisees for the right to exist as a Subway location, state governments collect franchise tax from companies for the ability to do business in their jurisdiction.
A startup is generally subject to a state’s franchise tax if the startup is incorporated in or conducting business in that state. For example, Delaware requires all Delaware corporations, regardless of a corporation’s activities in Delaware, to pay an annual franchise tax. Note that each state has its own methods for calculating franchise tax.
To learn more about Delaware’s annual franchise tax, see What are Delaware’s annual requirements for corporations?
Startups may be required to pay other taxes, depending on their activities and location.