Taxes for Startups: What Pre-Revenue and Early-Stage Startups Need to Know

Team Digits

Published February 26, 2025

March madness should only refer to the annual NCAA basketball tournament, not your company’s standard operating procedure when tax season rolls around. The best way to avoid a last-minute scramble (and unhappy surprises) is to know your tax obligations ahead of time.

We understand startup founders have a lot on their plates, and business taxes are complex. To help you keep everything straight, we put together a guide that includes tax basics, information about deductions and credits, and how to do tax planning for startups. Read on to make handling tax season less stressful.

Why understanding taxes is critical for startups

The difference between understanding the tax code and winging it on your tax forms can be thousands of dollars — cash that’s critical to pre-revenue and early-stage startups.

First and foremost, you want to avoid penalties for late or incorrect tax payments. But a knowledgeable company can do much more than that. Startups and small businesses may qualify for deductions and credits. However, first, you have to meet the requirements. The tax breaks you receive are, therefore, dependent on the choices you make long before tax season rolls around.

Fully understanding your tax obligations and opportunities will allow your company to operate more efficiently and accomplish more. On the flip side, companies that don’t take advantage of benefits meant to encourage investment in startups may hinder their own growth. Taking the time to plan for an optimized tax season can make the difference between a breakthrough year and difficult cash flow decisions down the line.

Tax basics every startup founder should know

The first step to making the most of your taxes is knowing what you have to pay and when. As a business owner, you’re responsible for federal and state taxes. Some localities also assess municipal taxes.

The good news is that most federal, state, and local taxes are similar in design — like federal income tax and state income tax — and therefore easy to plan for.

While we’re talking about federal taxes in this article, you can reach out to the Digits team for expert state and local tax advice as well.

The taxes startups have to pay

Startups are required to pay taxes on their income, payroll, and sales, among others.

Federal taxes startups are responsible for include:

Income tax: Corporations (including LLCs operating as corporations) fill out Form 1120 (C corp) or Form 1120-S (S corp). LLCs operating as partnerships fill out Form 1065.
FICA tax: Employers are responsible for paying 50% of each employee’s Medicare and Social Security tax—also called the Federal Insurance Contributions Act (FICA) tax. Form 941, due quarterly, covers these taxes.
Unemployment tax: Businesses also pay into unemployment insurance under the Federal Unemployment Tax Act (FUTA), using Form 940.
Withheld income tax: Companies are responsible for withholding income taxes from employees’ paychecks and remitting that amount to the government.

State and local taxes startups have to pay may include:

Income tax: Most states require any business operating within their borders to pay income taxes.
Sales tax: If you sell goods in a state with sales tax, you may need to collect and remit sales tax.
State payroll tax: State payroll taxes vary but may include unemployment insurance, employee training, state disability insurance, and your employees’ withheld income taxes.
Use tax: If you purchase an item from out-of-state in a place with no sales tax and use it in-state, you’ll owe tax on it as if you had to pay your state’s sales tax.
Property tax: If your company purchases any property, you’ll owe tax on it.
Franchise tax: The state you’re incorporated in and most states you have employees in (as well as some municipalities) charge a franchise tax. Since most startups are incorporated in Delaware, you’ll have to pay that state’s franchise taxes and the franchise taxes of your home state.

Some companies will also be responsible for other state or municipal taxes. To make sure you don’t miss any, it’s best to consult a tax expert familiar with your area.

Business tax deadlines for startups

Unlike individuals, businesses don’t just have one tax day to keep track of. In general, businesses that use a fiscal year must complete their main tax filings by the 15th day of the 3rd month after it closes. C-corporations must do so by the 15th day of the 4th month instead.

Math not your strong suit? That’s fine. Here’s how the dates shake out for companies whose fiscal year ends on December 31:

January 15, 2025: Monthly FICA and withheld income taxes are due. (See below for more details.)
January 31, 2025: Employers must send W-2 forms to employees (and 1099-NEC forms to contractors).
- Q4 or annual FICA and income tax returns are due.
- Annual unemployment tax returns are due.
- Quarterly unemployment taxes are due.
February 18, 2025: Monthly FICA and withheld income taxes are due.
February 28, 2025: Health insurance coverage forms (1094-B, 1095-B, 1094-C, and 1095-C) are due.
March 1, 2025: Delaware Annual Franchise Report is due
March 17, 2025: Partnership and S-corporation taxes are due.
- Monthly FICA and withheld income taxes are due.
April 15, 2025: C-corporation taxes are due.
- Sole proprietorship and single-member LLC taxes are due.
- Monthly FICA and withheld income taxes are due.
April 30, 2025: Q1 FICA and withheld income tax returns are due.
- Quarterly unemployment taxes are due.
- Quarterly Research & Development Tax Credit can be claimed (form 941).
May 15, 2025: Monthly FICA and withheld income taxes are due.
June 1, 2025: Delaware Quarterly Estimated Franchise Tax is due.
June 16, 2025: Monthly FICA and withheld income taxes are due.
July 15, 2025: Monthly FICA and withheld income taxes are due.
July 31, 2025: Q2 FICA and withheld income tax returns are due.
- Quarterly unemployment taxes are due.
- Quarterly Research & Development Tax Credit can be claimed (form 941).
August 15, 2025: Monthly FICA and withheld income taxes are due.
September 1, 2025: Delaware Quarterly Estimated Franchise Tax is due.
September 15, 2025: Taxes are due for partnerships and S-corporations that filed for extensions.
October 15, 2025: Taxes are due for C-corporations that filed for extensions.
October 31, 2025: Q3 FICA and withheld income tax returns are due.
- Quarterly unemployment taxes are due.
- Quarterly Research & Development Tax Credit can be claimed (form 941).
November 17, 2025: Monthly FICA and withheld income taxes are due.
December 1, 2025: Delaware Quarterly Estimated Franchise Tax is due.
December 15, 2025: Monthly FICA and withheld income taxes are due.

FICA and income taxes are due either monthly or semiweekly depending on your total tax burden. IRS Publication 15 has more details—but most startups will be on the monthly deposit schedule.

Tax deductions and credits startups can leverage

Startups can access tax credits and deductions meant to support entrepreneurs and small businesses. Both categories reduce your tax liability, but credits reduce the amount of tax due, while deductions reduce the amount of income you are taxed on. Increase your savings by taking steps to qualify for all applicable tax benefits.

The government allows companies to claim the Research and Development (R&D) tax credit when they experiment to solve problems and improve products or processes. Companies qualify for the R&D Tax Credit for the first 5 years in which they generate revenue, provided their gross receipts are lower than $5,000,000.

Businesses with fewer than 25 full-time employees (or equivalent) with low average wages can qualify for the Small Business Health Care Tax Credit. To do so, they must pay at least 50% of the employee cost of qualifying health plans. The credit is equal to a certain percentage of the premiums paid by the company.

The Credit for Small Employer Pension Plan Startup Costs helps defray the costs of launching a retirement plan for your company if you have 100 or fewer employees. You can also claim a credit for adding auto-enrollment to your 401(k) plans and contributing to your employees’ retirement savings.

Companies that hire individuals from certain targeted groups (including military veterans, SNAP/SSI recipients, residents in areas designated as empowerment zones or rural renewal counties, and more) qualify for the Work Opportunity Tax Credit.

Companies can also decrease their tax bill through deducting business expenses, such as:

Business insurance, licenses, and permits
Overhead, including rent and office space, office supplies, and utilities
Legal and accounting costs
Employee benefits
Depreciation of assets
Advertising and marketing costs

Make sure you speak with a tax professional to ensure you’re deducting all applicable expenses (and that you’re not claiming invalid deductions).

Tax planning for pre-revenue startups

Founders should think about tax credit and deduction eligibility from day one of a new venture. You may benefit from talking to a tax expert as you consider big questions about how your business will function.

Your business structure affects your tax obligations, so make sure taxes are one of your considerations when you choose between C corp, S corp, and LLC. S corps usually offer the biggest tax savings, but taxes are simplest with LLCs.

Your compensation and benefits choices impact your eligibility for certain tax credits. Startups that offer equity compensation should understand the taxation differences between incentive and non-qualified options. Offering other non-cash compensation could also affect your tax bill.

Carefully tracking your expenses is also a must: While you can deduct some in the tax year where they’re incurred, others require amortization or depreciation. Smart founders document everything and keep their books organized for tax prep (using a tool like Digits).

How bookkeeping and accounting help with startup taxes

Having thorough financial records is important for tax purposes, but tracking spending and income isn’t the only thing that matters. You also need records of operational choices that qualify you for tax credits and categories of expenses you can deduct.

Day-to-day solutions aren’t sufficient preparation for these sorts of big-picture needs. That’s why startups need solid books and a knowledgeable accountant on their side.

One of the biggest mistakes founders make when it comes to their financials is conflating accounting and bookkeeping. They both have to do with your spending, yes, but they’re not interchangeable. Startups without sufficient resources tend to focus on bookkeeping because it’s more immediately relevant. Any work done to track day-to-day cash flow and organize expenses falls under this category.

Accounting, on the other hand, is a practice that takes the long view of your organization’s finances. A good accountant can look at your books and forecast the future of your finances. They can also identify the tax implications of your financial choices.

A good accountant will help you with tax planning. They can identify all the tax credits you might be eligible for and even strategize for how you’ll qualify for additional tax benefits in the future. They’ll also be able to clarify state and local tax laws and advise you on changes to the tax code that will affect your company. Startups reap multiple benefits from contracting a knowledgeable accountant. If you don’t have one, Digits can help.

Simplify your books with Digits

It’s a lot of work to keep track of all these details, but you don’t have to go it alone. Digits is built from the ground up to help startups keep their books in order.

We use AI to automate much of the busy work that goes into sorting and organizing transactions so you don’t pay for unnecessary labor. Our tax package makes it easy to find deductible expenses, track profits, and stay on top of deadlines. Our CPAs are available to answer your financial questions and help with tax preparation. We’ll even file for you or coordinate everything for handoff to your tax preparer.

It’s easy to get ahead on taxes when you have the tools and expertise to support you. Digits can help prepare your startup for an easy tax season. Contact us today to learn more.