A guide to tax season for founders
Helen Chong
For U.S.-based startups, tax season is a nearly universal pain point.
That’s why Puzzle has put together the comprehensive guide to tax season for founders, complete with experts explaining almost everything you need to file easily and accurately.
Below, Luke Frye, CPA, our own Head of Customer Success at Puzzle, provides his insights into:
“It may be a cliché, but taxes are inevitable. The longer you wait to deal with them, the worse it’s going to get for your startup. If you’re not staying on top of things, enlist the help of tools like Puzzle or hire supportive professionals.”
When it comes to startup taxes, you can build from the beginning with the end in mind.
Without accurate financial records, how can you expect a seamless and compliant tax return?
So, here are three financial habits you can instill to ensure your startup conquers tax season — instead of the other way around.
Startups at their earliest stages are frequently made up of a group of friends. It makes sense that no one thinks to establish a legitimate payroll. (And, funnily enough, many founders forget to put themselves on payroll even after it’s set up.)
However, this is one critical step to ensuring you are legitimized as a company.
Founders often charge business expenses to their personal cards. These purchases also need to be put on the books. After all, accounting for everything will keep your records clean.
Ideally, you should reimburse yourself once a month under an accountable plan. This approach is “penny for penny,” says Luke, as opposed to a stipend, which would be taxable.
To avoid this headache entirely, you can also:
In the grand scheme of things, Luke recommends hiring a tax accountant as soon as you’ve finalized your incorporation.
In terms of preparing for tax season, he encourages every founder to locate an accountant, get in contact, sign a contract, and perhaps even pay them before the year’s end. By extension, if you wait until March, all of the best accountants will be swamped by then.
Overall, do not wait until you need a tax accountant. By then, it’ll likely be an emergency.
To find a vetted tax accountant who caters to startups, check out this directory by Puzzle.
“It’s frankly a garbage-in, garbage-out situation. If you have a haphazard accounting system, the quality of your tax return just will not be higher than the subpar quality of your bookkeeping.”
As a startup, your goal should be deploying as efficiently as possible — both in terms of dollars and human effort. This is especially the case for those who’ve raised capital.
For tax season, it is simply far more efficient and effective to bring on a professional.
Here are three reasons why.
Yes, it is technically cheaper for pre-seed and seed-stage ventures to DIY their finances.
After all, everyone is trying to minimize burn in current market environments, and services like, say, Stripe Atlas are cheaper than hiring a lawyer.
However, those immediate gains will not measure up to the big-picture returns driven by accountants with years of experience in maximizing savings. A founder’s basic financial education just does not compare.
In the rare case that you’re a founder who doubles as a highly efficient bookkeeper, you may be able to manually handle your company’s taxes. Or, even using software like Puzzle can get the job done — up to a certain point.
Once your startup seriously begins to scale, you, the founder, need to be out of the weeds. You want to be logging in to check relevant financials, not matching transactions.
If you’re a diligent and self-educated founder or CFO, you may go searching for resources online and find some pretty legit instructions, such as an IRS article.
While it may provide insights, the reality is: Online content is not the law. Tax codes and regulations are an entirely separate beast — best understood by accountants.
In the meantime, what are some reliable resources? Luke recommends three:
“I would not DIY all of your finances. For instance, if you DIY your bookkeeping, I highly encourage you to use a tax accountant — no matter what. Get at least one professional on your side to catch things you just don’t know about.”
The best accountants have spent years on the job, building up niche know-how and shortcuts.
Here are three high-value tax secrets that they love to pass on to startup founders.
It’s best practice to extend your tax return deadline every single year — for two reasons.
Let’s say you requested an extension in February and still filed your return by March. However, by May, you discovered new info that required you to correct your filings and properly account for your carry-forward loss.
Instead of filing an amended tax return, which is far more tedious and expensive, you can file a superseded tax return by your extended due date.
One such opportunity is the R&D tax credit — “basically free money,” explains Luke.
If you fund U.S.-based research and development, which technically includes paying salaries for engineers, designers, and any similar positions that develop products, the IRS can provide a credit against your payroll tax.
But here’s why this tax credit is especially impactful:
Even if you’ve overlooked this credit in the past, you may be able to get it refunded retroactively.
Accountants often execute work on a FIFO (“first in, first out”) basis. That means if you get your books to your accountant first, you’ll likely be filed first.
However, Luke also notes that accountants are “notoriously bad” with emails.
If you have their attention, respond as quickly as possible to keep it. Otherwise, waiting a day or two to reply may mean ending up back at the bottom of the stack.
“When it comes to communicating with your tax accountant, keep yourself top of mind and provide them with clear deadlines.”
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