Year-end checklist and tax planning for US subsidiaries


Entering the last few days of the year, it is important to review as a “checklist” some aspects of a tax or regulatory nature that should not be forgotten and that affect all US companies regardless of their size and whether or not they make a profit. Some of them are especially relevant for subsidiaries of international companies or companies owned by residents of other countries. Neglecting these obligations can lead to penalties, fines, costs and headaches that could have easily been avoided. This often occurs after the creation of new companies in the US, a process described in detail in our free guide.

We review the most important aspects in this article.

Year-end checklist

Here are some tasks that should be completed before the end of the year:

  • Review the company’s income and expenses during the fiscal year and those anticipated for the beginning of the following year to determine if there are tax planning and tax-saving opportunities. For example, in a year with profits, it could be decided to move to the current year some expenses that will be incurred in the near future, to take advantage of the corresponding tax deduction.
  • Prepare a first draft of the annual financial statements, making it possible to finalize them in the first months of the new year to comply with the tax filing requirements that we will discuss later.
  • Review company records and documentation to ensure they are complete and up-to-date.
  • Review the tax situation of the company’s employees and determine if adjustments should be made to the withholdings required from their wages (federal and state taxes, social security, Medicare, federal and state unemployment insurance, and others that may be applicable).
  • Make any additional federal and state estimated tax payments necessary to avoid late payment penalties and interest.
  • Review state tax obligations and ensure they are met in all states where the business has generated revenue.
  • Review employee benefit plans and make sure they comply with tax laws. For example, this is especially important when the company offers a retirement plan like a 401(k) or similar.

Form 1099

Businesses in the United States are required to submit a Form 1099 to any contractor or service provider they have worked with in the past year and to whom they have paid at least $600 in that period in rent, utilities (including parts and materials), prizes and awards or for other reasons. This form is used to inform the Internal Revenue Service (IRS, the agency in charge of collecting taxes in the US), and the contractor or supplier about the amounts that have been paid during the year. This allows the contractor or supplier to declare those payments on their tax return and pay the corresponding taxes. 

Businesses are required to file a 1099 form with the IRS and the contractor or vendor by January 31 of the year following the year the payments were made. If a business fails to comply with this obligation, it can face fines and penalties from the IRS.

It is not necessary to generate the 1099 form for payments made for personal purposes. You must issue 1099 forms only for payments you made in the course of your trade or business, and send them to any individuals or organizations of the partnership, LLC, Limited Partnership, or Estate type. It is not necessary to send it to corporations or LLCs that for tax purposes are considered corporations (S-corp or C-corp). 

The fines for failing to comply with this obligation can range from $30 to $100 per form (up to $1.5 million per year), depending on how long after the deadline the company issues the form. If a business intentionally ignores the requirement to provide an accurate beneficial ownership statement, it is subject to a minimum penalty of $250 per statement, with no maximum.

In the case of non-US contractors, as long as the services are performed entirely outside the US, Form 1099 is not required and withholding is not required on payments made. But in that case, you will need to get a Form W-8BEN (individuals) or a Form W-8BEN-E (businesses) signed by the foreign contractor. By signing this form, the foreign contractor certifies that it is not a US person. This form is not filed with the IRS. It should be on file in case the business is audited at some point, in which case it justifies why Form 1099 was not issued and why taxes were not withheld.

Form W2

Businesses in the United States are required to send a Form W-2 to each of the employees who have worked for them during the fiscal year. The W-2 form contains information about the wages or income the employee received during the tax year, as well as amounts that have been withheld from their wages to pay taxes, social security, and other deductions

Businesses are required to submit the W-2 form to the employee and to the IRS by January 31 of the year following the year the payments were made. If a business fails to comply with this obligation, it can face fines and penalties from the IRS.

The W-2 form is important to both the employee and the business, as it allows the employee to report income and pay applicable taxes, and it also allows the business to show that it has met its tax obligations in terms of the withholding and payment of taxes on the wages of its employees.

Federal Income Tax

In general, companies in the United States are required to file an income tax return each year, regardless of whether or not they made a profit during that period. It must be done no later than April 15 of the following year. 

The tax return is a document that businesses must submit to the IRS that contains information about their income, expenses, profits, and losses during the tax year. This information is needed to determine the amount of tax the business must pay to the federal government.

If a business fails to file a tax return on time or pay its due taxes, it can face fines and penalties from the IRS. Therefore, it is important that businesses meet their obligations in terms of filing tax returns and paying taxes on time.

If the company has been making a profit during the year, it must make quarterly estimated tax payments without waiting until April 15 of the following year. Failure to do so can result in penalties and interest payments accruing from the time payments should have been made.

Form 5472

Form 5472 of the United States tax authority, the Internal Revenue Service or IRS, must be prepared annually except in a few situations by foreign companies doing business in the United States, as well as United States companies that have more than 25% of their capital in the hands of foreigners. It must be submitted every year no later than April 15, for which it is convenient to plan it in advance with the help of a certified accountant or CPA. It is usually done along with the federal income tax return filed with the IRS. No-file penalties start at $25,000 and add up quickly, so careful management is essential. 

We have covered the details of this form in depth in this article from our blog.

State taxes

In addition to federal tax returns filed with the IRS, state income taxes are taxes that businesses must pay to the state in which they are located on the profits or income generated in that state. The state income tax rate varies by state. Businesses must comply with their obligations regarding the payment of these taxes and do so on time to avoid fines and penalties.  

On the other hand, each state establishes requirements on the presentation of an annual report (which has an associated payment) or the payment of a “franchise tax”, which must be done on time to avoid penalties and keep the company in a state of “good standing”, something essential to keep it active.

Given the diversity of state laws, it is necessary to verify the regulations applicable to the company based on the states in which it is registered and in all states where it has generated income. Some states apply what are known as “trade taxes” or “presence taxes” to companies doing business in that state, even if the business is not registered or headquartered in that state.

Where can I get help?

In the Markentry USA team we have certified accountants (CPAs) and lawyers who can help with everything related to compliance with your company’s accounting, tax and legal obligations, including the processing of the forms described in this article.

NOTE: This article is for informational purposes only. Markentry USA does not accept any responsibility for errors or omissions.