Congratulations to the first-time business owners!
Whether you’re freelancing full-time, selling a product, or running a new LLC, you’ve taken a giant step toward independence and financial growth.
However, if you, like most first-time business owners, find taxes unfamiliar, you’re not alone.
You’re not alone.
Many new entrepreneurs are unaware of the distinctions between business and personal taxes until they encounter an unexpected bill or penalty. And let’s be honest: the IRS isn’t exactly known for making things simple.
But here’s the good news: you don’t need an accounting degree to get this right. You just need a roadmap, and that’s precisely what this blog will give you.
Let’s break down what first-time business owners need to know about taxes, without the jargon or overwhelm.
1. Your Business Is Taxed Differently, Even If It’s Just You
If you’ve only ever filed a personal tax return, you might assume running a small business just adds a few extra lines. Not quite.
When you’re self-employed, you’re now responsible for:
- Making contributions to Social Security and Medicare, along with payments for self-employment and income taxes
- Filing quarterly estimated taxes instead of once a year.
- Monitoring your earnings and outlays over the year
And that’s just the beginning.
Pro tip: Start by identifying your business structure. This information determines your tax payment method and the forms you must submit.
2. Select the Proper Business Structure (It Is Important)
The legal framework of a business is among the first crucial choices an owner must make. Your decision impacts both your liability and your taxation.
Here’s a simple breakdown:
Sole Proprietorship:
- Easiest to start
- Your business is identical to ours.
- Taxes go through your return.
Limited Liability Company (LLC)
- Gives you legal protection
- Taxed similarly to a sole proprietorship (unless you choose to do otherwise)
- Flexible and great for single owners
S-Corporation (S-Corp)
- permits you to split your earnings between distributions and salaries.
- Can reduce self-employment taxes
- More paperwork, but bigger long-term tax benefits
Are you uncertain about which option is best for your situation?
Consult a CPA (Certified Public Accountant) or tax advisor before your first year ends. While it is possible to switch later, it is preferable to start on a positive note.
3. Estimated Taxes: Your New Reality
Unlike employees who have taxes taken out of every paycheck, business owners have to pay taxes on their own. You must estimate your debt and submit it to the IRS every quarter.
Here are the typical deadlines:
- April 15
- June 15
- September 15
- January 15 (of the following year)
Why it matters:
Even if you pay in full when you file, you may still be penalized if you don’t make enough payments.
Tip for success: Use bookkeeping software to estimate your quarterly taxes, or talk to a tax pro who can help you plan.
4. Keep Clean Records
Every deduction, every invoice, and every payment matters. It all matters come tax time.
Good recordkeeping doesn’t just help you save on taxes; it protects you in case of an audit.
Here’s what you should track:
- All business income (invoices, sales, etc.)
- Business expenses (software, office supplies, mileage, meals)
- Receipts and bank statements
- Payroll (if applicable)
Simple tip:
Use cloud-based tools like QuickBooks, Wave, or FreshBooks to keep everything in one place. Don’t rely on your memory or a shoebox of receipts.
5. Yes, You Can Write Off That (But Know The Rules)
The ability to deduct business expenses from your taxable income is one of the best things about being a business owner. However, you can only deduct expenses if you do it correctly.
Here are some common write-offs:
- The Internet and phone are used for businesses
- Office supplies and software
- Business meals (50% deductible)
- Mileage for business travel
- Home office (if it means IRS rules)
But be careful:
Not everything qualifies, and claiming too much can trigger IRS scrutiny. In situations of uncertainty, it is advisable to consult your tax professional before incorporating a deduction.
6. Distinguish Between Business and Personal Finances (This is Important)
If you’re currently using the same bank account for your rent, groceries, and business payments, please consider making a change.
Combining personal and business finances often leads to difficulties in bookkeeping.
- Makes bookkeeping a nightmare
- Complicate your taxes
- Weakens your legal protections (especially for LLCs)
Easy fix:
Establish a credit card and a checking account tailored for your business operations. Even if you’re a sole proprietor, such an arrangement helps you stay organized and audit-ready.
7. Don’t Wait Until April to Think About Taxes
Here’s the truth most new business owners learn the hard way: tax prep is a year-round job.
You can’t just “figure it out later.” Waiting until April often means
- Scambling to find receipts
- Missing out on deductions
- Paying more than you should
- Stress, penalties, and surprises
Better idea:
Set a reminder every month to review your income and expenses. Please reconcile your books on a quarterly basis. It is advisable to consult a tax advisor at least annually, before the filing period.
Final Thoughts: You’ve Got This (And You Don’t Have To Do It Alone)
At first, business taxes may seem intimidating, but don’t expect to know everything right away.
Start with the basics:
- Choose the right structure
- Track your income and expenses
- Pay estimated taxes
- Learn what you can deduct
- Ask for help when needed
Please keep in mind that you can save a lot of money later on by making the correct choices now.
If you’re uncertain about where to start, seek assistance from a professional. A professional can help you set up systems, avoid costly mistakes, and focus on what you do best: running your business.
Are you struggling to manage your tax obligations? We work with first-time business owners to simplify the tax process and set you up for success. Contact us today to schedule a consultation.