Startup Guide: 5 Steps for Preparing for Your First Tax Filing
posted Aug 27, 2013 by Anthony Mangiarelli, CPA
You have launched your business, established the appropriate entity structure, registered with the state, secured an employer identification number (EIN), opened a bank account and set up your business accounting. What should you be aware of as you enter your first tax filing season with your new business?
1. Annual Corporate Tax Filing - For a calendar year filer your corporate tax returns (both Federal Form 1120 and Massachusetts Form 355) are due March 15th. However, the due dates for both returns can be extended (via Federal Form 7004 and Massachusetts Form 355-7004) until September 15th. Please note, the filing of an extension only extends the time you have to file, not the time you have to pay any tax liability. All tax liabilities are due March 15th, regardless of whether or not an extension was filed.
How Much Will I Have to Pay with My Tax Filing? - Your federal corporate tax will vary depending on your taxable income (net income after allowable business deductions). For example, if your corporation has $75,000 of taxable income, your tax liability will be 15% on the first $50,000 of taxable income and 25% on the taxable income in excess of $50,000 up to $75,000. The mathematics look like this: [($50,000 x 15%) + ($75,000 - 50,000) x 25%] resulting in a federal tax liability $13,750. Taxable income in excess of $75,000 can be subject to a maximum rate of 39%.
Your Massachusetts corporate excise tax is calculated by adding two different measures of tax: a net income measure (calculated at a rate of 8%), and either a tangible property measure or a net worth measure, depending on whether the corporation is a tangible or an intangible property corporation (the property/net worth measure is imposed at a rate of $2.60 per $1,000 of either a corporation’s taxable Massachusetts tangible property or its taxable net worth). A corporation’s total excise tax is the combination of the property/net worth and net income measures, or the minimum corporate excise tax, whichever is greater. The minimum corporate excise tax is $456.
If your company is profitable it is important to discuss potential tax liabilities with your tax advisor
Should I Make Estimated Payments? Corporations, if required, should make estimated tax payments throughout the year to ensure that no penalties are assessed for late payment of tax (as taxing authorities require corporations to pay taxes evenly throughout the year). While this is certainly something to keep in mind (especially if your company is profitable in the early stages) most startup companies will not generate sufficient income for this to be an immediate concern.
2. Corporate Annual Reports (both Massachusetts and Delaware) - Massachusetts corporate annual reports are due annually by March 15th. Your annual report can be filed online. You will need your customer ID number and PIN to log in (this information can be requested from the Secretary of State via email to email@example.com). The annual filing fee is $109 if filed online ($125 if paper filed). Please note, if your corporation is formed in a state other than Massachusetts you will need to file your annual report as a foreign corporation.
Delaware corporate annual reports are due March 1st and can be filed online. You will need your business entity file number. The Delaware Franchise tax is the lesser of two calculations: authorized shares method and assumed par value capital method (below are examples illustrated on Delaware’s corporate website).
The authorized shares method is calculated as follows: 5,000 shares or less (minimum tax) - $75, 5,001 to 10,000 shares - $150, each additional 10,000 shares or portion thereof adds $75. The maximum annual tax is $180,000. Example: A corporation with 1,250,000 shares authorized has a franchise tax of $9,450 ($150 plus $9,300[$75x124]).
The assumed par value capital method is calculated by utilizing all issued shares (including treasury shares) and total gross assets (total assets on Form 1120). The tax rate under this method is $350 per million or portion of a million. The calculation is best illustrated by following a fact pattern. For example, a corporation has 1,000,000 authorized shares of stock with a par value of $1, 250,000 authorized shares with a par value of $5, and gross assets of $2,000,000. They issue shares totaling 505,000.
- Step 1 - Divide total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par”. Example: $2,000,000 assets / 505,000 shares issued = $3.960396 assumed par.
- Step 2 - Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par. Example: $3.9860396 assumed par x 1,000,000 authorized shares = $3,986,040.
- Step 3 - Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value. Example: 250,000 authorized shares x $5.00 par value = $1,250,000
- Step 4 - Add the results of Step 2 and Step 3. The result is your assumed par value capital. Example: $3,986,040 + $1,250,000 = $5,236,040 assumed par value capital.
- Step 5 - Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000 by 1,000,000 and then multiply by $350. Example: 6 x $350 = $2,100.
If you have a large number of authorized shares and minimal assets, then the assumed par value method generally produces the lower tax liability.
3. Independent Contractor vs. Employee - When bringing people on to help grow your company; be sure you’re properly classifying them as employees or independent contractors. The IRS and many states have adopted common law principles to determine if a worker is an employee or an independent contractor. These principles focus primarily on the level of control an employer has over the worker (i.e. does the employer actually define what is being done and how it will be accomplished). When you come across this circumstance, ask yourself the following questions:
a) Do you set the hours the person works, provide the necessary equipment/materials/tool, and dictate how the person gets the job done? If you answered yes, this relationship sounds more like an employer/employee.
b) Do you provide an assignment/job, provide a timeline and do not dictate where/when the work is done? If you answered yes, this relationship appears to be more of an employer/independent contractor.
Please keep in mind that the above example is very general, there are specific guidelines and tests to determine if someone meets the definition of an independent contractor or employee.
4. 1099-MISC Filing Deadline and Requirements - Form 1099-MISC must be filed annually to report all payments made for services to a nonemployee, if the payments total $600 or more. The Forms 1099 are required to be mailed to recipients by January 31st and the Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) and copies of Form 1099 are required to be filed with the IRS and Massachusetts DOR by February 28th. A good habit to get into is to request that all vendors/contractors complete a Form W-9 Request for Taxpayer Identification Number and Certification. This will ensure that you have all the necessary information (name, address and taxpayer identification number) to accurately complete your Form 1099 at year end.
5. Payroll Taxes and Payroll Services - Included in payroll taxes are four basic payroll taxes that impact most employers: Federal income tax, Social Security, Medicare and State income tax. The employer generally remits federal taxes (including social security and Medicare) withheld on behalf of employees semimonthly, monthly or quarterly. Form 941 reports the quarterly wage and tax remittances. The employer must also pay federal unemployment taxes (FUTA) on behalf of the employee. FUTA taxes are remitted quarterly and reported annually on Form 940. Forms W-3/W-2 are filed annually and copies of W-2 are distributed to employees.
Massachusetts requires employers to register for payroll tax withholdings by filing Form TA-1. Once registered with Massachusetts, employers can remit state taxes withheld on behalf of employees. In addition, employers also must pay state unemployment taxes (SUTA), generally 3% of the first $14,000 of wages per employee. Prior to remitting SUTA taxes, employers need to file a Form 1110A Employer Status Report with the Department of Employment and Training to register and pay state unemployment taxes.
Given the complexity, various filings dates and steep penalties for noncompliance, I would highly recommend outsourcing your payroll processing to a third party payroll provider. The services are cost effective and will allow you to focus your efforts on growing your business.
For more information and guidance with starting your business please contact any member of our Start up and Emerging business team at 888-KLR-8557.