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Table of content
R&D tax credits most startups should consider
Other strategic financial considerations for startups
What to look for in a startup accountant
When and why to outsource payroll services
What to look for in payroll services?
R&D tax credits most startups should consider
Section 41 of the Internal Revenue Code lets qualified businesses claim multiple federal tax credits for expenses related to the research and development (R&D) of a “business component.” That can include products, processes, techniques, software, and more.
The calculations behind the credit amounts are complex, but the two primary potential benefits for startups include:
Dollar-for-dollar income tax reduction: Qualified businesses can typically claim between 6% and 10% of eligible R&D costs each year as a nonrefundable tax credit that reduces their federal income taxes dollar for dollar.
$1.25 million payroll tax reduction: Startups with no more than five years of gross receipts and less than $5M in gross receipts for the credit year may be able to claim up to $250K in annual FICA payroll tax credits for up to five years.
Since the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, these R&D tax credits have become much more accessible for the average startup founder or small business owner.
If you incur any labor or material costs related to R&D, you should strongly consider consulting an expert startup tax accountant to determine if you can claim these lucrative tax credits.
Other strategic financial considerations for startups
Startups face a variety of other strategic financial challenges that startup accounting services can make much easier to navigate. For example, some of the most important issues for you to consider include the following:
New business formation: Your choice of legal entity–such as a C Corporation, S Corporation, or limited liability company– can significantly impact not only your annual taxes but also your ability to raise funds from an investor or achieve a favorable M&A exit.
GAAP compliance: Adopting Generally Accepted Accounting Principles (GAAP) and accrual accounting can be an intimidating undertaking, and lenders and investors often require GAAP financial statements before they’ll consider working with you.
Sales tax compliance: Many startups have sales tax responsibilities in multiple states. Determining where you have nexus, collecting the proper tax amounts, and filing returns across all of them can be incredibly challenging.
Long-term financial planning: As your startup grows in size and complexity, it becomes increasingly difficult to make informed business decisions without analysis techniques like cash flow forecasting or financial modeling.
Waiting too long to tackle these types of financial challenges only ever makes them harder to manage. As a result, it’s often wise to engage a startup accounting service sooner rather than later to prevent them from escalating, rather than waiting and trying to fix mistakes later.
What to look for in a startup accountant
If you’re a startup founder searching for an outsourced accounting service, competitive rates should be considered table stakes. Beyond pricing, here are some of the most important things to look for before choosing an accounting firm to manage your financial records:
Relevant experience: The specific challenges involved in accounting for startups can vary significantly between industries. Make sure you choose an accountant who has a proven track record of successfully guiding businesses through the complications you need help navigating.
Technological compatibility: You may be surprised that conflicting tech preferences can be a significant hurdle to clear when collaborating with financial service providers. Look for an accountant who is willing and able to use the software you use or plan to implement.
Strong reputation: Look for accountants who have received positive feedback from their previous customers. Referrals from your network are a great place to start. Crowdsourced online reviews can also help, but keep in mind that people are more likely to leave them when upset, which can skew results.
In addition, pay attention to less tangible characteristics, such as communication style and cultural fit. Many Certified Public Accountant services offer free consultations, which can be an excellent opportunity to gauge how well you’re likely to collaborate with them.
When and why to outsource payroll services
Managing the payroll process in-house can quickly become overwhelming for startups. More than just issuing paychecks, it involves tax compliance, employee benefits administration, and meticulous record-keeping.
Payroll outsourcing is often the most efficient choice, freeing up valuable resources and allowing you to focus on growing your business rather than administrative tasks.
Here are some specific indications for when you should consider outsourcing payroll:
Rapid growth: If your startup is experiencing rapid growth, the complexity of your payroll information can increase exponentially. If you expect to scale in the near future, it may be best to outsource and avoid getting in over your head.
Limited internal resources: If you’re increasingly finding that your team lacks bandwidth or the expertise necessary for managing payroll, it’s probably time to think about outsourcing.
Compliance concerns: If you’re struggling to maintain compliance with federal or state payroll tax filing requirements, you risk incurring expensive penalties. Consider hiring a payroll service that can file the required payroll reports and help you avoid them.
Outsourcing your payroll management payroll services not only streamlines operations but also provides peace of mind, knowing that experts are handling your payroll and compliance needs.
What to look for in payroll services?
Payroll management and compliance are both time-consuming and complex, and it’s often most efficient to outsource the work. However, it’s not always easy to figure out how to choose a payroll service.
Beyond fundamental factors like pricing, reputation, and quality customer service, here are some of the most important things to look for when you’re trying to find the best payroll services:
Full service platform: Try to meet as many of your payroll management needs as possible with a full service payroll provider to save yourself the hassle and expense of juggling multiple.
Automated payroll solution: The best payroll software can run payroll automatically once set up, which is far superior to manual systems. Not only does it save time, but it also ensures employees are paid accurately and timely.
Payroll tax support: Payroll tax filings are complex, especially when you have employees across multiple states. Your payroll company should help you stay in compliance with requirements.
Bookkeeping software integration: To automate payroll processing, your software must be able to integrate with your bookkeeping solution. It vastly reduces the need for manual payroll data entry, making your system much faster and reducing your vulnerability to human error.
R&D tax credit support: R&D tax benefits can be lucrative for startups, including potentially providing up to $250K in annual payroll tax credits for up to five years. However, detailed documentation is required. Look for services with a payroll feature capable of generating it efficiently.
If you're looking for a payroll service that fulfills all these requirements, try Zeni. Our comprehensive platform is designed to automate payroll for you and maintain compliance across all states and jurisdictions.