The Startup’s Guide to Corporate Taxes

Starting a business is exciting, but as soon as you incorporate it, you must follow some critical steps to stay compliant.

One of the most important things to do is understand your startup’s business tax obligations. It’s not the most thrilling part of running a company, but getting it right early on can save you headaches — and money — down the road.

What corporate taxes does a newly incorporated startup have to worry about? Whether you’re a Delaware C-corp or operating in multiple states, let’s walk through the essentials and learn how Mosey can help you stay on top of corporate compliance.

What Corporate Taxes Do Startups Face After Incorporation?

When your new business is freshly incorporated, there are three key areas you need to focus on: federal corporate income tax, Delaware franchise tax (if you incorporated there), and state taxes (which depend on where you’re doing business).

Let’s go through them one at a time:

Federal Corporate Income Tax

The U.S. corporate tax rate currently sits at 21%.

What does that mean for your startup? If you’re turning a profit, you’ll pay 21% of your taxable income, which is essentially your revenue minus expenses.

No revenue yet? To stay compliant, you’ll need to file Form 1120 — a federal corporate income tax return — every year.

Delaware Franchise Tax

If you chose Delaware for your incorporation (and many startups do), you’re also on the hook for Delaware franchise tax. It’s an annual requirement, and even if your startup isn’t generating business income yet, you still have to pay it.

State Taxes

When it comes to state taxes, things get more complicated. Depending on where your startup operates, you might face different types of taxes — not just corporate income tax but state franchise tax, as well.

For example, if you have employees in California or an office in Texas, you could be looking at taxes for both. California has a corporate income tax and a minimum franchise tax, which means you’ll owe something even if you’re not yet making a profit.

Other states, like Nevada and Wyoming, skip corporate income tax entirely. But you still might get hit with other taxes, such as a gross receipts tax.

Since each state has its own rules, it’s important to keep tabs on where your business activities could trigger tax obligations. Whether it’s income tax, franchise tax, or specific taxes tied to your startup’s revenue, you want to stay ahead of the game.

How Much Will You Owe?

Once your startup is incorporated, it’s time to figure out how much you’ll owe in taxes. The answer depends on a few factors, like how much revenue you’re bringing in, where you’re operating, and the specific taxes you’re on the hook for. Here’s a rundown of what you can expect:

Federal Corporate Income Tax

At the federal income tax level, the corporate tax rate is a flat 21%. If your startup has taxable income (revenue minus expenses), that’s the rate you’ll pay. For example, if your small business startup makes $100,000 in profit, you’ll owe $21,000 in federal corporate income tax.

You won’t owe any tax if you’re not yet making a profit. However, remember that you still have to file a return, even if the amount owed is zero.

Delaware Franchise Tax

If you’re incorporated in Delaware, you must also pay the Delaware franchise tax. This tax isn’t based on income but on the size of your company.

The state offers two ways to calculate this tax: the Authorized Shares Method or the Assumed Par Value Capital Method. Most early-stage startups go with the Assumed Par Value Capital Method, which can result in lower bills.

You’ll owe $450 in Delaware franchise tax at minimum, but depending on your company’s size, that number could be higher. The good news is that you can choose the method with the lowest amount due.

State Taxes

Then, there’s the question of state taxes. If you’re operating in multiple states, it gets even more complex. Some states have corporate income taxes, others have franchise taxes, and some have both.

For example, if you have employees in California, you’ll have to pay a corporate income tax and a minimum franchise tax (which starts at $800).

Each state has its own rules, and if your startup is doing business in more than one state, you’ll need to make sure you’re following all the local tax laws.

Moreover, if you’re already established in another state and choose to do business in Delaware, you will need to foreign qualify with the Secretary of State.

When Are Business Taxes Due?

Additionally, you must stay on top of deadlines to avoid potential penalties. Here’s what you need to know about when your business taxes are due:

Federal Corporate Income Tax

Your federal corporate income tax return (Form 1120) is due on April 15 each year. If you need more time, you can file for an extension, which gives you until October 15 to file.

Heads up: An extension for tax filing doesn’t mean an extension for paying. If you owe taxes, the payment is still due by April 15.

Delaware Franchise Tax

Your annual franchise tax payment is due by March 1. This is a strict deadline, so make sure you file it early to avoid late fees.

State Taxes

The due date for state taxes depends on the state. Many states align with the federal deadline of April 15, but it’s important to double-check the rules in each state where your business operates. Some states may have different deadlines, especially for franchise taxes, which can follow their own schedule. Oftentimes, these deadlines are tied to your foreign qualification date in the state.

What Are the Potential Penalties for Late Payments?

Missing a tax deadline can cost you — literally. Let’s take a look at what happens if you miss the due date for federal, state, or Delaware franchise taxes:

Federal Corporate Income Tax

If you don’t file your federal corporate income tax return on time, the IRS charges a penalty of 5% of the unpaid tax for each month your return is late, up to a maximum of 25%. If you owe taxes but don’t pay on time, you’ll also face a penalty of 0.5% on the tax you didn’t pay every month until you’ve paid it off.

Delaware Franchise Tax

Delaware is strict on late payments. If you miss the March 1 deadline, you’ll face a $200 penalty, plus 1.5% interest per month on any unpaid balance. That can add up fast, so it’s vital to stay ahead of this.

State Taxes

State tax penalties vary depending on the state. In many cases, the penalty is 5% of the unpaid tax for each month the payment is late, but some states have different rules. For example, California imposes a minimum penalty of $50 for late franchise tax payments, and it can increase.

How Can Your Tax Obligations Differ Based on Your Business Structure?

How your startup is structured affects the taxes you’ll owe, and it’s crucial to know what you’re dealing with upfront:

C-Corporations (C-Corps)

As a C-corp, your startup’s profits are taxed at the corporate level at a rate of 21%. If your business distributes dividends, your shareholders will pay individual tax on those, as well.

While C-corps have certain incentives, like being able to issue stock options, they also come with double taxation.

Limited Liability Companies (LLCs)

LLCs provide flexibility. They’re usually considered pass-through entities for tax purposes, meaning the company’s profits or losses are reported on your personal tax return. This way, you avoid corporate tax, but you’ll still need to pay self-employment tax, which covers Social Security and Medicare contributions.

Nonprofits

Nonprofits generally don’t pay income tax as long as they meet IRS eligibility requirements. However, if your nonprofit earns money outside its core mission, it may still owe taxes on that unrelated income. Make sure to file tax forms for both types of income, if applicable, to stay compliant.

What Are Common Tax Benefits?

Fortunately, there are tax benefits designed specifically for startups. These incentives can reduce your overall tax liability and keep more of your hard-earned cash.

R&D Tax Credit

If your startup is investing in innovation — like developing new products or improving processes — you might qualify for the R&D tax credit. This credit lowers your tax bill and can even lead to capital gains if your innovation takes off.

Payroll Tax Deductions

Don’t forget about payroll tax deductions. You can deduct the employer portion of Social Security, Medicare, and other payroll-related taxes. It’s a way to save more during your first year in business.

How To Approach Tax Planning as a Startup

All small business owners need to get their tax strategy right early on. The good news is that you don’t have to manage it alone. You can take several routes to ensure your tax filings are correct. Here’s how to approach tax planning as a startup:

Leverage Tax-Saving Strategies

Take advantage of tax incentives like the R&D credit, depreciation on capital assets, and even stock options for employees. Make sure you’re qualifying for all the deductions you’re eligible for to minimize your tax liability.

Practice Clean Bookkeeping

Good bookkeeping is essential for tracking expenses and staying organized. Whether you operate a sole proprietorship or a partnership, having clear records will help you file forms accurately and avoid surprises when tax time rolls around.

Work With a Tax Professional (CPA)

A CPA can help you make sense of tax laws, spot potential savings, and ensure compliance. They can help with everything from calculating self-employment tax to reviewing your stock options and qualified small business stock eligibility.

Partner With Mosey

Mosey makes it easy to manage compliance across multiple states. If you’re running a startup business with employees in different states, our compliance management platform can help you stay on top of state-specific tax obligations like sales tax and franchise fees.

Master Compliance With Mosey

Mosey helps you manage everything from payroll taxes to tax year filing deadlines to state agency mail, so you don’t have to juggle it all yourself. Book a free consultation with Mosey if you’re ready to streamline your tax compliance.

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