Tax compliance involves fulfilling an ongoing set of legal obligations, including filing the right returns, reporting transactions accurately, and paying what you owe on time. It can get complicated quickly, and every business will face different requirements. The tax systems in developed countries typically rely heavily on voluntary compliance, but businesses sometimes fail to comply. The US Internal Revenue Service (IRS), for example, estimates that about $696 billion in taxes went unpaid in 2022.

Below, we’ll explain what tax compliance is, what it requires at the business level, how the consequences of noncompliance accumulate, and what cross-border activity adds to obligations.

Highlights

• Tax compliance covers three distinct activities: filing returns, reporting transactions accurately, and paying what you owe on time.

• The consequences of noncompliance scale with severity and duration, ranging from penalties for failing to file to personal liability for unpaid payroll taxes.

• Cross-border activity introduces entirely different tax frameworks that don’t always correspond to domestic compliance obligations.

What is tax compliance?

Tax compliance is the act of meeting all your legal tax obligations accurately, completely, and on time. That covers three distinct activities: filing the right returns with the right authorities, reporting income, expenses, and transactions correctly, and paying whatever you owe by the applicable deadlines. Tax compliance is an ongoing process for all businesses and requires vigilance and cooperation from finance, accounting, human resources (HR), payroll, and legal departments.

How does tax compliance work for a business?

Businesses must comply continuously through systems that capture the right data at the right time and route it to the right place. The practical tax compliance workflow has three layers.

Recordkeeping

Every revenue transaction, deductible expense, payroll payment, and asset purchase needs to be logged with enough detail to support a tax filing or withstand an audit. Tax authorities generally require businesses to retain records for at least three years from the date a return is filed, although substantial underreporting can extend that period. Records should be kept indefinitely if no return is filed or fraud is suspected, as there’s no statute of limitations in those scenarios.

Calculation and classification

Errors can accumulate in revenue recognition, depreciation schedules, contractor vs. employee classification, and the deductibility of specific expenses. Getting calculations or classifications wrong can create discrepancies between what you report and what the tax authority expects to see. Stripe Tax automatically calculates and collects the right amount based on transaction location and product type, which matters when you’re selling across multiple US states or countries with different rules.

Filing and payment

Returns must go to the right authorities by the right deadlines, with any amounts due paid. These include quarterly estimated tax payments for businesses in some countries, including the US. Underpaying estimated tax generates penalties, even if you pay the full balance when you file.

What are the consequences of tax noncompliance?

The consequences for tax noncompliance increase with the severity and duration of the failure, and they can build over time. Here are the main outcomes:

• Failure-to-file penalties: Tax authorities charge a percentage of unpaid taxes per month. The amounts vary by jurisdiction but tend to follow similar logic.

• Failure-to-pay penalties: Separate from the filing penalty, this is an additional percentage of unpaid tax charged per month, with interest accruing on both.

• Personal liability: In the US, the IRS can hold individual officers or employees personally liable for unpaid payroll withholding taxes.

• Audits: An audit that opens one year’s return can expand into more years if irregularities appear.

• Criminal liability: These penalties are reserved for intentional misconduct such as tax evasion, filing false returns, and willful failure to collect or remit payroll taxes.

• Reputational consequences: Tax liens can appear in public records and credit reports. Investors, lenders, and institutional customers who conduct due diligence will find them.

How does tax compliance differ for businesses and individuals?

The core obligation is generally the same for both businesses and individuals: you have to report your income, claim your deductions, and pay what you owe. Here’s how they differ:

• Filing frequency: Individuals typically file once a year. Businesses often have to file quarterly estimates, monthly or semiweekly payroll deposits, annual returns, and potentially returns for sales tax, value-added tax (VAT), or goods and services tax (GST).

• Deduction complexity: Individuals work with a relatively narrow set of deduction categories. Businesses handle depreciation schedules, cost of goods sold (COGS), business vehicle use, deferred revenue, and entity-level elections.

• Scope of consequences: An individual who makes a filing error typically faces a penalty and interest. A business that misclassifies workers, fails to remit payroll taxes, or misreports revenue can create liability that affects the entire company.

What does cross-border activity mean for tax compliance?

Operating internationally exposes your company to different tax frameworks and obligations, which can make tax compliance more complicated. Consider the following.

Indirect tax

Many countries outside the US use VAT or GST rather than sales tax. If you’re selling digital goods or services to customers in the EU, you’re required to collect and remit VAT at the customer’s local rate, which varies by country and product type. The EU’s One Stop Shop (OSS) scheme lets businesses register in one EU member state and file a single return that covers all EU sales.

Non-US companies that sell into the US need to be aware of the differing sales tax rates and rules by state. Tools like Stripe Tax can handle tax calculation and collection across a wide range of jurisdictions and product types.

Permanent establishment

If your business has sufficient physical presence in a foreign country (e.g., employees, an office, a warehouse, certain types of contractors), you might enter “permanent establishment” status. That makes you liable for corporate income tax in that country. The thresholds differ by country and tax treaty, and they become relevant faster than you might expect when you hire or open offices abroad.

Withholding taxes

Many countries require the paying party to withhold tax on certain cross-border payments such as dividends, royalties, interest, and some service fees. The applicable rate depends on whether a tax treaty exists between the two countries.

Is your business compliant?

Compliance gaps are often the result of growth outpacing established internal systems. Keep these common tax compliance factors in mind:

• Sales tax nexus: Economic nexus thresholds mean you can trigger a collection obligation in a US state without a physical location there. Keep track of sales by state to know when you’ve crossed $100,000 in sales or 200 transactions annually. (This is typically the threshold, but it varies in some states.)

• VAT or GST thresholds: Many countries with VAT or GST systems require foreign businesses to register from their first sale, while others allow businesses to avoid registration until they exceed a certain sales threshold.

• Worker classification: Misclassification between contractors and employees can lead to an audit, and the liability runs backward. You can owe payroll taxes on payments you made years ago.

• Estimated payments: If you’re using last year’s tax liability to set this year’s quarterly payments without adjusting for growth, you’re likely underpaying and penalties start accumulating the moment an installment is missed.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and GST on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.