Tax and the City: What To Know As A Startup In NYC
Doing Business in New York
New York attracts a lot of businesses, both homegrown and foreign-born companies aspiring to break into the US market. In these series, we will look at the realities of Doing Business in New York, the business capital of the world. Whether you are taking advantage of the wonderful Atlas program offered by Stripe (for which EGFS is a tax partner), or setting your business’ sails on your own, there are several issues you should be aware of to ensure a smooth journey.
Tax and the City
Springtime in New York is breathtakingly beautiful, with blooming daffodils, crocuses and cherry trees illuminating the concrete jungle. NYC spring highlights are the magnificent Macy’s Flower Show, famed Tribeca Film Festival, and a grandiose New York Tech Day at Pier 94, with tens of thousands of exhibitors and visitors. In addition, spring is also a tax season. Companies that operate in NY are required to comply with (and often, make payments for) several different types of tax, with specific requirements depending on their business activities in a given tax year. Let’s look at each of type of tax separately, and then consider some common misconceptions.
Corporate income tax return is what we refer to when we say “tax returns for C Corporations are due on April 18, 2017” (Partnership – LLC and S Corporation – returns were due on March 15). US-based corporations use the income tax return forms to report their income, gains, losses, deductions, credits, and figure their income tax liability. Foreign shareholders, foreign subsidiaries and foreign assets (including foreign bank accounts) all need to be reported as well. Partnerships file a copy of partners’ K-1 schedule with the IRS to report their share of the partnership’s income, deductions, credits, etc. In addition to Federal filings, New York State and New York City filings are required as well.
You may be familiar with this type of tax if your company is incorporated in Delaware. Delaware accesses franchise tax from the companies “headquartered” there, and it’s usually due on the first business day of March. Companies incorporated in New York State, or those incorporated in Delaware but doing business in New York, are subject to New York franchise tax as well. The NY franchise tax form is typically filed along with the New York State income tax form.
Payroll tax is something that many entrepreneurs forget to include in their business’ projections. For the simplicity of math, add 10% of employee / future employee salary as a payroll tax expense. In addition to payroll tax, employers must also procure workers compensation policy for every person they employ – and the New York State Workers Compensation Board will penalize you with substantial fines for lack of such policy for current or former employees. There is also unemployment insurance and other fees associated with having employees. To sum up: got employees? Make sure you are checking all of the above-mentioned boxes. Just ask us how. Got contractors? Make sure they are not in fact employees. New York State Department of Labor may think otherwise. Payroll tax is due every time an employee receives a paycheck.
If you have customers, who are buying either your product(s) or a service you provide, determine whether or not need to collect and remit sales tax. This depends on where those customers are, rather than where your business is. Sales tax is an intricate issue, with all 50 states and some local jurisdictions within states setting the rules on what is taxable and what is not. Case in point: SaaS is taxable in New York, but tax exempt in the neighboring New Jersey. That is, at the time of this writing – those regulations change often. Sales tax is collected when the sales transactions takes places, and is remitted to corresponding state or local tax authorities either quarterly or monthly.
1.I don’t need to file corporate income tax returns until we get revenue. According to the IRS, “Unless exempt under section 501, all domestic corporations (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Failure to file may have various implications, including inability to be compliant for investor due diligence purposes, inability to obtain New York State’s equivalent of a “Certificate of Good Standing” that is called the “Certificate Under Seal”, etc.
2. If I don’t have time to file a corporate income tax return by the deadline and I don’t have revenue, I can just file later that year with no significant penalties. This may be true, unless your company has foreign shareholders holding 25% of stock or more, foreign subsidiaries, and / or foreign assets (including foreign bank accounts). In that case, even if you have minimal activity in the US and no revenue at all, failure to file your corporate tax return including the required foreign disclosure forms will result in the $10,000 penalty (per required foreign disclosure form). If I don’t have time to file a corporate income tax return by the deadline, file an extension! Many companies do that, and it’s not looked down upon in by authorities, investors, banks or others in any way, and it will give you few extra months to submit the return – all while being compliant.
3. I file my own personal tax returns, so I’m fine filing my own corporate income tax return. Corporate and partnership income tax filings are rather involved, and as part of the corporate best practice recommendations, I would strongly advocate for hiring a professional corporate tax accountant.
4. My company is based in Delaware, so no need to file a New York State / New York City corporate tax return. If you / your office / your employees are not physically based in Delaware and actually based in New York, you should register to do business in New York as a “foreign corporation” (in this case, foreign means “headquartered in another State”) and submit NY State and NY City corporate tax returns in addition to Federal ones. No need to pay Delaware State Tax if your company has no physical presence there – and the vast majority of Delaware-based companies fall into that category. Delaware accesses franchise tax from such companies instead.
5. I can pay myself / my staff now, and figure out payroll tax later. This is a bad plan. Payroll reporting is streamlined and stress-free if using a payroll service. However, payroll providers would not do retroactive filings, and those would need to be submitted manually. In addition, as discussed earlier, it is important to have worker’s compensation policy for everyone who is – or was supposed to be employed – and those policies cannot be retroactive either.
6. I am selling / pre-selling my product through a crowdfunding platform, so I don’t have to worry about collecting / remitting sales. Taxation of crowdfunding income it is still a grey area and IRS has not issued specific regulations regarding crowdfunding. However, the rule of thumb is that if whoever is contributing to a crowdfunding campaign is getting goods in return, you should calculate the value of the good as income and calculate expenses against that “sale”. If the contribution is greater than the market price of an item, the spread may be considered donation / gift.
7. If my company doesn’t qualify for START-UP NY, there are no other incentives my company can take advantage of. While the START-UP NY program is great and can be a life savior for companies, it is very hard to qualify for it. However, recently (starting with 2016 tax year) another great tax incentive has been introduce on the Federal level – Research & Development Tax Credit. If you are designing and testing a new product, software or a new process, and your R&D activity is US-base – whether performed by employees, contractors, or a US-based development company – you may qualify for this credit. However simple or overwhelming your company’s tax situation may be, we at EGFS would be happy to help – you can enjoy the City and not worry about your taxes.