For start-ups, tax filing season can feel like an unnecessary formality and waste of time. For ventures still generating Net Operating Losses (NOLs), taxable income seems like a far-off concern to be dealt with another day. Unfortunately, start-ups with this outlook are likely missing several valuable opportunities to position their fledgling entity for future success. As the Young Entrepreneur Council founder Scott Gerber points out in his business.com article 12 Tax Issues for Startups to Watch, a small amount of strategic time investment now can minimize headaches in the future.
High on the 12 Tax Issues list is “Don’t forget about payroll taxes”. Historically,payroll taxes were impossible to minimize. It was a simple system. If you have payroll: you pay payroll taxes. That is, until the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) was signed into law. This 2015 year-end legislation gave permanent status to the research tax credit. In addition, the PATH Act included several provisions to make the R&D tax credit more small business friendly. Beginning with tax year 2016, start-ups (as defined by the PATH Act) can use the first $250,000 of R&D tax credit generated in a tax year to offset the employer’s Social Security portion of FICA payroll tax liability. The 6.2% tax paid on W2 wage amounts can now be retained and put to use by start-ups who accurately qualify and quantify R&D activity to generate an R&D tax credit. Start-ups without gross receipts for 5 prior tax years and less than $5 million in gross receipts may be eligible for the payroll tax offset.