Tax Compliance Checklist for Startups

Startups have several federal tax obligations from day one: registering the business, getting an Employer Identification Number (EIN), paying estimated taxes quarterly, handling payroll taxes if you hire, filing information returns for contractors, and keeping records the IRS can verify. Getting a handle on these early makes everything easier later.

Your business structure determines how you file taxes, whether you pay self-employment tax, and what forms you use every year. This is the decision that shapes every other item on this checklist, so it's worth getting right before you file anything.

Sole proprietors report business income on Schedule C of their personal Form 1040 and pay self-employment tax on net earnings. Partnerships file Form 1065 and issue Schedule K-1 to each partner, who then reports their share on their personal return. LLCs are flexible — a single-member LLC is taxed as a sole proprietorship by default, while a multi-member LLC is taxed as a partnership. Either can elect corporate tax treatment by filing Form 8832 or Form 2553 with the IRS. C corporations file Form 1120 and pay corporate income tax separately from their owners. S corporations file Form 1120-S and pass income through to shareholders, avoiding the double taxation that C corporations face.

An Employer Identification Number (EIN) is your business's federal tax ID. Corporations, partnerships, and any business with employees need one. Sole proprietors and single-member LLCs without employees can use a Social Security number instead, but an EIN keeps your personal number off business documents and is worth getting regardless.

Apply at irs.gov/ein. Online applications are processed immediately and you'll get your EIN the same day. The IRS online application is available Monday through Friday, 7 AM – 10 PM ET. Fax applications take about 4 business days. You'll need your EIN to open a business bank account, hire employees, file payroll taxes, and issue 1099s to contractors.

Federal registration is only part of the picture. Most states require separate registration for income tax withholding, sales tax, and unemployment insurance before you start operating or hiring. Requirements vary by state and by what your business does.

If you plan to hire employees, you'll also need a state unemployment insurance account number before your first hire. Some states require a general business license; others only require licenses for specific industries. Check your Secretary of State's website and your state's department of revenue to figure out what applies to you. A tax professional can help you sort through state-specific requirements if you're unsure.

A dedicated business bank account keeps your business finances separate from your personal finances. Without that separation, a court could decide your business isn't really a distinct entity — and at that point your personal finances are fair game for business debts or judgments.

From a tax standpoint, a separate account puts all your income and deductible expenses in one place. That makes filing faster and reduces the chance of missing deductions or triggering questions. You'll need your EIN and your formation documents to open the account. Most banks also require a copy of your Articles of Organization or similar state filing.

If you expect to owe at least $1,000 in federal tax for the year — after withholding and credits — you need to make quarterly estimated tax payments. This applies to sole proprietors, partners, and LLC members. Corporations generally need to make estimated payments if they expect to owe $500 or more. Missing these payments can mean an underpayment penalty even if you pay in full at tax time.

The federal quarterly due dates are April 15, June 15, September 15, and January 15 of the following year, adjusted when those dates fall on weekends or holidays. Use Form 1040-ES to calculate and pay if you're a sole proprietor or pass-through owner. Most new business owners underestimate this obligation in year one — setting aside 25–30% of net income each quarter is a reasonable starting point until you know your actual tax rate.

Once you hire employees, payroll taxes become one of your most time-sensitive obligations. You're responsible for withholding federal income tax, Social Security tax at 6.2% on wages up to the annual wage base, and Medicare tax at 1.45% with no wage base limit. You also pay a matching employer share of Social Security and Medicare on top of what you withhold.

File Form 941 quarterly to report wages and taxes withheld. File Form 940 annually for federal unemployment tax (FUTA). Send W-2s to employees by January 31 each year. An Additional Medicare Tax of 0.9% applies to employee wages over $200,000 — you're required to withhold that too. Getting payroll wrong is expensive: back taxes, penalties, and interest can add up fast, so most new employers use payroll software or a payroll service from the start.

If you pay an independent contractor $600 or more in a calendar year, you need to file Form 1099-NEC with the IRS and send a copy to the contractor. The $600 threshold resets per contractor, per year. Before you pay anyone, have them fill out a Form W-9 — it confirms their tax classification and Taxpayer Identification Number (TIN), and tells you whether a 1099-NEC is required.

Both the contractor copy and the IRS copy of Form 1099-NEC are due by January 31 of the year following payment. Most LLCs and corporations are exempt from receiving a 1099-NEC, but the main exceptions are LLCs that provide legal or medical services and businesses that have elected S Corporation status. When in doubt, collect a W-9 anyway — it protects you if the IRS asks questions later.

Sales tax is generally owed where your customers are located, not where your business is based. If you sell products or certain services across state lines, you may have sales tax obligations in multiple states — especially after the Supreme Court's 2018 South Dakota v. Wayfair decision, which expanded states' ability to require out-of-state sellers to collect sales tax. Check each state's economic nexus thresholds to figure out where you need to register.

Excise taxes are narrower. The federal government imposes them on specific goods and activities — fuel, alcohol, tobacco, and certain transportation-related expenses are common examples. Some states levy their own excise taxes on a broader range of items. If your business touches any of these categories, a tax professional can help you figure out what applies.

New businesses can deduct up to $5,000 in startup costs and $5,000 in organizational expenses in their first year of operation. Costs above those amounts are amortized over 15 years. These deductions phase out if your total startup costs exceed $50,000, so tracking every pre-opening expense matters.

Beyond startup costs, a few credits are worth knowing about early. The R&D Tax Credit lets businesses claim a credit for qualified research expenses, including employee wages tied to research activities. If you hire from certain targeted groups, the Work Opportunity Tax Credit (WOTC) reduces your tax liability dollar-for-dollar. If you work from home, the Home Office Deduction covers a portion of your home expenses if the space is used exclusively for business. A tax professional can help you figure out which credits your business qualifies for.

The IRS requires you to keep records that support every entry on your tax return. That means income, expenses, payroll, and asset purchases — all of it. The general rule is 3 years from the date you filed the return. But if you underreport income by more than 25%, the IRS has 6 years to audit. Keep records indefinitely if fraud is involved or if you have assets you haven't fully depreciated.

Acceptable records include sales receipts, paid invoices, deposit slips, canceled checks, and bank statements. The format doesn't matter as long as the records are accurate and retrievable. Most business owners find that a dedicated accounting tool connected to their business bank account handles most of this automatically. The records you keep in year one are the ones you'll be glad you have if the IRS comes looking in year four.

• Gross receipts for all sales
• Inventory records
• Business expenses, including receipts and invoices
• Travel and other deductible expenses
• Payroll records and employee tax filings
• Asset purchase records for depreciation purposes