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Startup compliance

Startup compliance checklist: elections, payroll and tax treatment

The major items every new business should handle in its first year, in plain English: structure, elections, payroll, state registrations and how startup costs are taxed.

OverviewIndividuals, all statesBusinesses, all statesMulti-state and reciprocityCompliance calendarTax ratesStartup compliance
Do not wait. Several startup elections have short deadlines (30 days for a Section 83(b) election, about 75 days for an S corporation election) and cannot always be fixed later.
1. Choose and form your entity
  • Pick a structure: sole proprietorship, LLC, S corporation, C corporation or partnership, based on taxes, liability, funding plans and where you will operate.
  • Form the entity with the Secretary of State and appoint a registered agent.
  • Get an EIN from the IRS (free, online, Form SS-4).
  • Prepare an operating agreement or bylaws and keep a records book. We coordinate with your attorney for legal documents.
  • Beneficial ownership (BOI) reports: since August 14, 2026, FinCEN's final rule exempts U.S. companies and U.S. persons, so a company formed in the U.S. does not file. Foreign companies registered to do business in the U.S. still report their foreign owners.
  • Open a separate business bank account and card from day one.
2. Elections and tax classification
  • S corporation election (Form 2553): generally due within 2 months and 15 days after the start of the tax year or formation. Late-election relief exists.
  • Entity classification (Form 8832) if you want an LLC taxed differently from the default; generally within 75 days.
  • Section 83(b) election within 30 days of receiving stock subject to vesting. It cannot be fixed later.
  • Choose your accounting year and method (cash or accrual).
  • Qualified small business stock (QSBS): C corporation stock may qualify for a federal gain exclusion if held long enough. Rules changed for stock issued after July 4, 2025 (3, 4 and 5-year tiers and a higher cap). Plan this before you issue shares.
  • Pass-through entity tax (PTET) election in states that offer it.
3. Payroll and workers
  • Register for state withholding and unemployment insurance (and any local taxes) before the first payroll.
  • Collect Form W-4 and Form I-9 from each employee; report new hires to the state within the required days.
  • Set up payroll tax deposits (federal and state) and the quarterly and annual returns (Forms 941, 940, W-2, W-3).
  • Pay owner-employees of an S corporation a reasonable salary through payroll.
  • Buy workers' compensation insurance where required and check wage and hour rules.
  • Classify workers correctly: employee or independent contractor. Starting with payments made in 2026, the 1099-NEC and 1099-MISC threshold is $2,000.
4. Tax treatment of startup costs
  • Startup and organizational costs: up to $5,000 each can be deducted in the first year (reduced as costs exceed $50,000); the rest is amortized over 15 years. Costs before you open generally cannot be deducted as ordinary expenses.
  • Equipment, vehicles and software: deduction timing depends on depreciation, Section 179 and bonus depreciation rules in effect.
  • Research and development: special rules for deducting or crediting qualifying R&D, including a payroll tax offset for some small companies.
  • Home office, vehicle and travel: keep records that meet the substantiation rules.
  • Self-employment tax, the qualified business income deduction and estimated tax payments for owners.
  • Sales tax: collect it where you have nexus, keep resale certificates, and file on schedule.
5. Licenses and local rules
  • City and county business licenses, zoning and signage permits.
  • Professional or industry licenses and insurance.
  • DBA (assumed name) filing if you operate under a different name.
  • State and local sales tax permit.
  • Foreign qualification if you operate in a state other than where you formed.
  • Annual report and franchise tax in your state, with dates on your calendar.
6. Books, records and ongoing compliance
  • Set up bookkeeping and a chart of accounts at the start, and reconcile monthly.
  • Keep contracts, receipts and mileage logs. Keep tax records for at least three years (longer for some items).
  • Calendar federal and state deadlines (see our compliance calendar).
  • Plan quarterly estimated taxes and year-end tax planning.
  • Foreign owners or foreign activity: Forms 5472, 5471, 8858 or 8865, FBAR and Form 8938 may apply.

General information only, for tax year 2026. Rates, forms and rules change and have many exceptions. Confirm with the state agency or contact us before you act.

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Did you know?
  • You can put up to $24,500 of your pay into a 401(k), 403(b) or TSP in 2026. At 50 or older you can add $8,000, and at ages 60 to 63 you can add $11,250 (up to $35,750 in all). IRS: 2026 retirement limits →
  • Work for yourself with no employees? A solo 401(k) lets you save $24,500 as the "employee" and add an employer contribution on top, for up to $72,000 in total before catch-up. A SEP-IRA has the same top limit. IRS: One-participant 401(k) plans →
  • A SEP-IRA can be opened and funded as late as your tax filing deadline, including extensions. That makes it one of the best last-minute ways for a self-employed person to lower the tax bill. IRS: SEP plans →
  • You can put $7,500 in an IRA for 2026, or $8,600 if you are 50 or older, and you have until the April 2027 filing deadline to do it. IRS: IRA contribution limits →
  • A SIMPLE IRA is an easy retirement plan for a small business. Employees can defer $17,000 in 2026, $21,000 at 50 or older, and $22,250 at ages 60 to 63. IRS: SIMPLE IRA plans →
  • An HSA is taxed in your favor three times: money goes in tax-free, grows tax-free and comes out tax-free for medical costs. The 2026 limit is $4,400 for self-only and $8,750 for family coverage, plus $1,000 if you are 55 or older. IRS: Publication 969 →
  • A defined benefit or cash balance plan can let a business owner with steady, high income put away far more than a 401(k) allows, especially after 50. The yearly benefit limit for 2026 is $290,000. IRS: Defined benefit plans →
  • New in 2026: if your Social Security wages from the employer that sponsors your 401(k) were over $150,000 in 2025, your catch-up contributions must go in as Roth (after-tax) money. IRS: 2026 retirement limits →
  • If your income is modest, the saver's credit can cut your tax bill by up to $1,000 ($2,000 for a couple) just for saving for retirement. For 2026 it reaches incomes up to $40,250 single and $80,500 joint. IRS: Saver's credit →
  • When you work for yourself you pay both halves of Social Security and Medicare tax: 15.3% on net earnings up to $184,500 in 2026, and 2.9% above that. Half of it is deductible on your return. IRS: Self-employment tax →
  • The qualified business income deduction can take up to 20% off the tax on pass-through business income. The 2025 law made it permanent and added a $400 minimum deduction if you have at least $1,000 of qualified income. IRS: QBI deduction →
  • Estimated taxes are due four times a year: April 15, June 15, September 15 and January 15. Paying 100% of last year's tax (110% if your income was over $150,000) usually protects you from the underpayment penalty. IRS: Estimated taxes →
  • The business mileage rate rose to 76 cents a mile on July 1, 2026 (it was 72.5 cents from January to June). A simple log of dates, miles and purpose is what turns miles into a deduction. IRS: Standard mileage rates →
  • Tips, overtime and car loan interest can now be deducted even if you do not itemize. The tips deduction is up to $25,000, overtime up to $12,500 ($25,000 joint), and car loan interest up to $10,000. IRS: New deductions →
  • Work from home regularly and exclusively for your business? The simplified home office deduction is $5 per square foot, up to 300 square feet, which is up to $1,500. IRS: Home office deduction →
  • If you are self-employed, the health insurance premiums you pay for yourself, your spouse and your dependents may be deductible even if you do not itemize, up to your net profit. IRS: Self-employed health insurance →
  • In 2026 a business can deduct up to $2,560,000 of equipment it buys and uses, in the year of purchase. And 100% bonus depreciation is now permanent for property acquired after January 19, 2025. IRS: Section 179 and bonus depreciation →
  • You only have to send a 1099-NEC or 1099-MISC to a contractor you paid $2,000 or more in 2026. It used to be $600. Still collect a W-9 from every contractor before the first payment. IRS: Information returns →
  • S corporation owners who work in the business must pay themselves a reasonable salary. Too low, and the IRS can recharacterize distributions as wages and charge payroll tax and penalties. IRS: S corporation compensation →
  • Illinois lets partnerships and S corporations elect to pay Illinois tax at the entity level. The owners can then get a federal deduction that works around the $40,400 cap on state and local taxes. Illinois tax guide →
  • Startup costs for a new business: up to $5,000 can be deducted in the first year and the rest over 15 years, so keep every receipt from before opening day. IRS: Publication 535 →
  • Business meals are generally 50% deductible when they are directly related to your business and you keep the receipt and a note of who attended and why. IRS: Publication 463 →
  • Good news for U.S. companies: since August 14, 2026 they no longer have to file beneficial ownership reports with FinCEN. Only foreign companies registered to do business in the U.S. still report. FinCEN: BOI reporting →
  • Pay your child a reasonable wage for real work in your sole proprietorship and the wages can be a business deduction. Under 18, no Social Security or Medicare tax is withheld, and their standard deduction can shelter the wages from income tax. IRS: Family employees →
  • Payroll taxes you withhold belong to the government from the moment you take them out of a paycheck. If they go unpaid, the IRS can hold the owner personally liable for the full amount. IRS: Trust fund recovery penalty →
  • Late payroll tax deposits can bring penalties of up to 15%. Payroll taxes are due on a fixed schedule, and the penalty grows the longer a deposit is late. IRS: Failure to deposit penalty →
  • Hiring someone who works from another state usually means registering for that state's withholding and unemployment taxes before their first paycheck. We handle payroll in every state. Our payroll service →
  • Not filing costs ten times more than not paying: 5% of the unpaid tax per month (up to 25%) against 0.5% per month. If you cannot pay, still file on time. IRS: Failure to file penalty →
  • An extension to file is not an extension to pay. Pay what you expect to owe by the original due date to avoid penalties and interest. IRS: Extension to file →
  • You may qualify for IRS first-time penalty abatement if you filed and paid on time for the past three years. Ask before you pay a penalty. IRS: Penalty relief →
  • A Notice of Deficiency gives you 90 days (150 if you are outside the U.S.) to challenge the IRS in Tax Court before the tax is assessed. The date is on the letter and it cannot be extended. If you got an IRS letter →
  • You generally have three years from the date you filed to claim a refund. Old returns with missed deductions can still pay off. IRS: Amended returns and refunds →
  • The IRS generally has three years to audit a return, and six years if more than 25% of income was left off. Keep your records at least that long. IRS: How long to keep records →
  • Renting out your home for 14 days or fewer in a year? The rent is generally tax-free, and you do not even have to report it. IRS: Renting residential property →
  • You deduct the cost of a residential rental building over 27.5 years, even though it may be rising in value. Land is not depreciable. A cost segregation study can speed up the deductions. Real estate investors →
  • If you actively manage your rental, you may deduct up to $25,000 of rental losses against other income. The allowance shrinks to zero between $100,000 and $150,000 of income. IRS: Rental losses →
  • Selling your main home? You may exclude up to $250,000 of gain ($500,000 if married filing jointly) if you owned and lived in it for at least two of the last five years. IRS: Sale of your home →
  • If your foreign bank and financial accounts total more than $10,000 at any time in the year, you generally must file an FBAR. It is due April 15, with an automatic extension to October 15. An honest mistake can still cost more than $16,000 per late report. Foreign accounts and FBAR →
  • Received a large gift or inheritance from abroad? Gifts over $100,000 from a foreign individual in a year generally must be reported on Form 3520, even though they are not taxable. The late-filing penalty starts at 5% a month. IRS: Form 3520 →
  • Form 8938 and the FBAR are not the same thing. They have different thresholds, are filed in different places and some people must file both. Foreign accounts and FBAR →
  • U.S. citizens and green card holders owe U.S. tax on income from anywhere in the world, wherever they live. The foreign tax credit and the foreign earned income exclusion ($132,900 in 2026) help avoid paying twice. IRS: Foreign earned income exclusion →
  • Many mutual funds sold outside the U.S. (including in India) are treated as passive foreign investment companies. They need an extra form every year, and the tax rules can be harsh. International families →
  • The 2026 standard deduction is $16,100 for single filers, $32,200 for married filing jointly and $24,150 for heads of household. Age 65 or older? There is an extra deduction, plus the new $6,000 senior deduction. IRS: 2026 inflation adjustments →
  • New in 2026: even if you take the standard deduction, you can deduct up to $1,000 of cash gifts to qualified charities ($2,000 for a married couple). IRS: Charitable contributions →
  • For 2026, long-term capital gains are taxed at 0% on income up to $49,450 (single) or $98,900 (married filing jointly) of taxable income. Hold investments more than a year to qualify. IRS: Capital gains and losses →
  • You can give up to $19,000 to any one person in 2026 without filing a gift tax return, and you can give to as many people as you like. IRS: Gift tax →
  • On October 1, 2026 Treasury opened a Trump Account for every eligible child under 18. A parent must claim it in the official app before the $1,000 government deposit (for U.S. citizen children born 2025 to 2028) or any gifts can arrive. Our Trump Accounts guide →
  • If you sell a stock at a loss and buy the same or a substantially identical one within 30 days before or after, the loss is generally disallowed for now. IRS: Publication 550 →
  • Every federal income tax return asks whether you received or sold digital assets such as cryptocurrency. Keep records of every transaction. IRS: Digital assets →
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