Understanding US Business Taxes: Reporting, team and key challenges
For businesses operating in a single State, the complexity calculating the correct level of tax will be far less than a business operating in 20+ States. This is also complicated by the fact that some taxes are collected monthly or quarterly, and others once a specific threshold is reached. Some States will accept payment online and for others, it is mandatory.
Reporting & Payment
To pay for a local provider to complete a federal and State tax return can cost from $800 for a “one man band”, $2k for a regional firm and up to $10k with the Big Four. Typically an additional cost will be added for further States.
Some of our portfolio companies find it useful to produce a “Compliance Calendar” which aggregates many of the specific State deadlines for filings.
For many of the taxes, there will be State-specific documents that will need to be completed. The IRS provides a calendar, albeit not overly clear, on page 7 of the IRS tax handbook.
It is also very important to keep a record of all employee expenses and benefits that are claimed throughout the year as these can be scrutinised by the tax authorities. Online expenses applications such as Expensify can be useful for this.
In terms of specific actions required when starting to trade in additional States, the following bodies will normally expect to be updated:
- Secretary of State — for authority to do business. Usually entails an annual report requirement;
- Department of Revenue — for most taxes including income tax, sales; and
- Department of Labour — for payroll related taxes such as Unemployment Insurance (not required when using a PEO for payroll).
How to resource your US finance team
Many of the portfolio companies we have worked with in the US have different approaches. There is however some commonalities around the following points:
- Enabling a European CFO at the company HQ to continue to manage group finances by treating the US entity as a department, albeit with specific complexities, rather than an entirely new business;
- Continuing to run centralised finances from the UK only works if the information flows between the UK and US are strong;
- Getting a local accountancy firm to assist with preparing tax filings rather than completing this from the UK is strongly advised;
- Having a tax consultant that can advise on State-by-State regulations is essential for understanding the tax implications of particular courses of action e.g. employing a new travelling sales person or expanding into a new State; and
- Leveraging a PEO or payroll provider to manage payroll taxes can really streamline the process as many service providers such as Trinet or ADP manage both Federal and State filings and reporting in the background.
- Understanding what taxes need to be paid when given that there is an impressively complex range of variables;
- Ensuring that Sales Tax is front of mind across the organisation as actions such as a spontaneous sale in a different State or an employee working from home, can trigger this;
- Incorporating the correct level of Sales tax in all invoices;
- Ensuring you have registered for Sales Tax in a given State before you start collecting it. This is otherwise a criminal offense;
- Tax involves multiple slow and often paper-based processes at a Federal, State and district level. You should expect to be sending letters and faxes rather than emails and online transfers for many items;
- Whilst the cost of making errors with tax-related topics is large, there are many tax refunds and bonuses that can be claimed. Many of these can be hard to find but a specialist adviser can help identify these;
- Filing annual accounts will also involve “international attachments” which must be completed on any foreign entity within the same group. These can be complex additional documents to file and many smaller accountancy firms can struggle with some of the details here;
- 1099 filings must be completed for any contractors. Sometimes the definition of a “contractor” can be unclear but the fine is paid on each contractor filing outstanding. This can become a large fine fairly quickly; and
- If employers are looking to pay for employee accommodation this is typically subject to payroll tax and as a result, this may not be the most efficient way to distribute benefits to your team.
You might also like
- Understanding US Taxes: Corporation tax and Federal taxes
- Understanding US Business Taxes: Sales Tax, Franchise Tax and Property Tax
Where to go next
Check out our Dropbox for a range of additional resources.
Given the specialist and technical nature of these topics, speaking to accountants and advisors such as those below is strongly suggested:
- Eric Collins, Frank Hirth;
- Bradley Smallberg, Schissel Smallberg;
- Don Dismuke, Dixon Hughes Goodman
- Greg Capitalino, Kranz Associates; and
- Michael Hamilton, KPMG.
Thanks in particular to John and Kevin at Antidote, Keith at Graze, Katherine at Semafone, Eric at Frank Hirth, Bradley at Schissel Smallberg and Greg at Kranz Associates for your help in researching this topic.
This blog and those in this series are aimed at helping entrepreneurs learn about the US market, what it takes to start here, and ultimately what it takes to succeed here. Many of the topics (if not all) are complex and it is best to view these blogs as a basic introduction from which you the entrepreneur must triangulate to your own specific set of circumstances — and invariably it will be sensible and appropriate to seek third party professional advice.