The founder’s guide to business taxes.

Taxes become less intimidating when you know the basic mechanics. The most useful starting point is the difference between revenue, expenses, book income, taxable income, cash flow, and tax due.

Revenue is not the same as taxable income

You generally do not pay income tax on total revenue. You pay tax based on taxable income, which starts with revenue and then adjusts for deductions, accounting methods, credits, and specific tax rules.

Book income and taxable income can differ

Your financial statements may use accrual accounting to show economic performance, while tax rules may require different timing or treatment for certain items. That means book profit and taxable income are related, but not always identical.

Common deductible business expenses

• Payroll, benefits, and employer payroll taxes.
• Contractor payments and professional fees.
• Software, cloud infrastructure, and business tools.
• Rent, utilities, insurance, and office costs.
• Marketing, sales, travel, and customer acquisition costs.
• Accounting, legal, compliance, and tax preparation.

Research costs after recent law changes

Domestic research and experimental costs may generally be more favorable again for tax years beginning after 2024, while foreign research costs can still require long amortization. This area is technical, so companies doing meaningful R&D should coordinate accounting method, credit, and filing decisions with a tax professional.

Missing tax deadlines creates avoidable penalties, interest, and operational distraction. Build a filing calendar early, and make sure bookkeeping is closed far enough ahead of each deadline to prepare accurate returns.

Other forms founders often see

• Form 941: quarterly employer payroll tax return.
• Form 940: annual federal unemployment tax return.
• Form 1099-NEC: nonemployee compensation reporting for eligible contractors.
• Form 1099-MISC: certain miscellaneous payments.
• Form 6765: research credit calculation and claim.
• Form 8974: used to apply qualified small business R&D payroll tax credit against payroll tax.

The R&D credit is intended to reward companies for qualified research activities. It can apply to more than laboratory research. Software development, platform improvements, prototypes, technical process development, manufacturing improvements, and AI or data infrastructure work may be worth reviewing.

The four-part test, in plain English

• Business component: the work improves or creates a product, process, software, formula, technique, or invention.
• Technical uncertainty: the team is unsure how to achieve the result, whether it can be achieved, or which design will work best.
• Process of experimentation: the team evaluates alternatives through testing, modeling, prototyping, iteration, or analysis.
• Technical nature: the work relies on engineering, computer science, physical science, biological science, or similar technical discipline.

Documentation to keep

Good documentation connects technical work to people, time, and costs. Save project summaries, technical uncertainty, design docs, sprint tickets, pull requests, experiment notes, prototypes, test results, payroll records, contractor scopes, and cloud or supply costs where relevant.

Common mistakes

• Waiting until tax season to reconstruct projects.
• Claiming broad engineering spend without explaining the technical uncertainty.
• Ignoring contractor agreements and rights to research results.
• Not coordinating Form 6765 with payroll credit forms where the payroll offset is used.
• Assuming every engineering task automatically qualifies.

The strongest R&D process is year-round. Treat it like part of the monthly close, not a once-a-year tax scramble.

Sales tax is often discovered late because companies assume it only applies to physical goods or only where the company has employees. Modern rules are broader. Economic nexus can require a company to collect and remit sales tax based on sales activity in a state, even without physical presence.

Why SaaS companies should pay attention

Software taxability varies by state. Some states tax SaaS or electronically delivered software, while others do not. The result depends on product type, customer type, state sourcing rules, exemptions, and how the product is delivered.

Why e-commerce companies should pay attention

E-commerce brands can trigger obligations across many states through marketplace sales, direct-to-consumer sales, inventory locations, fulfillment arrangements, and transaction volume. Marketplace facilitator rules help in some cases, but they do not remove every state-level obligation.

When to review exposure

• Revenue expands across states.
• The company launches a new product line or pricing model.
• A SaaS company begins selling to larger customers in taxable states.
• An e-commerce company adds marketplaces, fulfillment centers, or inventory locations.
• A financing or diligence process is approaching.

Payroll and contractor workflows are not just administrative. They affect payroll taxes, state registrations, worker classification, benefits, R&D credits, 1099 filings, financial reporting, and cash planning.

Employees

Employees generally require payroll tax withholding, employer payroll taxes, payroll filings, state registrations where applicable, benefits administration, and proper year-end reporting. Remote employees can create additional state payroll and income tax considerations.

Contractors

Contractors can be simpler, but they still require documentation. Collect W-9s before payment, track eligible payments by vendor, review whether a 1099 is required, and keep contracts that explain services and intellectual property ownership.

Monthly process

• Reconcile payroll registers to the general ledger.
• Review contractor payments and missing W-9s.
• Track headcount changes and payroll tax registrations.
• Separate engineering payroll when supporting R&D credit analysis.
• Confirm payroll liabilities are paid and cleared.

Tax readiness starts with bookkeeping discipline. If transactions are miscoded, receipts are missing, accounts are unreconciled, and liabilities are not reviewed, tax work becomes slower, more expensive, and less reliable.

Monthly close checklist

• Reconcile bank, credit card, loan, and payment processor accounts.
• Review revenue, refunds, discounts, fees, deferred revenue, and receivables.
• Review vendor bills, payables, prepaids, accruals, and fixed assets.
• Confirm payroll, benefits, contractor payments, and tax liabilities.
• Update schedules for debt, equity, R&D, inventory, sales tax, and intercompany activity where relevant.
• Prepare a close package with statements, variance notes, and open issues.

What Empire helps coordinate

Empire helps growing companies connect bookkeeping, tax readiness, credits, reporting, and financial operations into one rhythm. That means fewer last-minute surprises and clearer ownership over finance tasks.

This guide is for informational purposes only and does not provide legal, tax, or accounting advice. Consult a qualified professional about your specific situation.