Important Tax Tips For New Business Owners

Important First Steps

Before diving into day-to-day operations, it’s crucial to lay a strong financial and legal foundation for your business. The choices you make in the beginning can significantly impact your tax obligations and overall financial well-being. Taking the time to complete these essential first steps will help you avoid costly mistakes and ensure you’re on the right track from the start.

Choose The Right Business Structure

One of the most important things you can do to set yourself up for success at tax time is to select the correct type of business entity.

• Sole Proprietor. This is the simplest business structure, with no legal distinction between yourself and the business. Although it’s easy to set up, keep in mind that your personal assets are not protected. You’ll file as an individual (pass-through taxation) and report any business income and losses on Form 1040, Schedule C.
• Partnership. There are several types of partnerships, including general (GP), limited (LP), and limited liability (LLP). Each is treated as a pass-through entity, meaning the partners are responsible for reporting their share of income, deductions, and credits (found on Schedule K-1) on their personal income tax returns (Form 1040). The partnership itself is required to file Form 1065 (informational return) with the IRS.
• C Corporation. A C Corp is a separate legal entity. The corporation pays corporate income tax and files its own return (Form 1120). Shareholders, however, must pay personal income tax on any dividends received.
• S Corporation. Unlike a C Corp, an S Corp is treated as a pass-through entity, avoiding double taxation. Shareholders who work for the business must pay themselves a salary. Income and losses are reported on their personal income tax return (Form 1040, Schedule K-1).

Apply For an EIN

Once you’ve determined your business structure, you’ll need to apply for an Employer Identification Number (EIN). If you’re a sole proprietor with no employees, you can use your Social Security number (SSN), but we recommend getting an EIN for legal reasons. Most banks require an EIN when opening a business account.

You can apply for an EIN online for free and get your number immediately (if approved). You’ll need your entity type and the SSN of the responsible party in charge of your business. If you’re applying as a third-party designee, you’ll also need signed authorization.

If you’re unable to apply online, you can also request an EIN by fax (855-641-6935) or postal mail using Form SS-4. Mail to IRS, Attn: EIN Operation, Cincinnati, OH 45999. It takes approximately 4 weeks to receive your EIN by mail and 4 business days by fax.

Separate Personal & Business Finances

Next, you’ll want to set up a separate bank account and credit card for your business. This is critical for both legal and financial reasons, such as:

1. Simplifying accounting, so you can easily track income, expenses, and deductions.
2. Providing liability protection, if you’re an LLC or corporation.
3. Improving access to financing and credit by helping the business establish a credit history.
4. Increasing IRS compliance and audit protection – never commingle your personal and business finances, as this is the easiest way to get into trouble with the IRS!

Understand Your Tax Obligations

Now that you have your business set up, it’s time to understand your ongoing tax obligations. Depending on your entity structure, you may have to contend with some or all of these tax requirements.

Quarterly Estimated Taxes

Most business owners, regardless of entity type, will need to file and pay quarterly estimated taxes. The IRS requires taxpayers to make these payments if they expect to owe $1,000 or more when they file their annual income tax return.

Sole proprietors, partners, C corporations, and shareholders (S Corp) are required to make payments by April 15, June 15, September 15, and January 15 (following year). All entities, except C Corps, may use Form 1040-ES or file online through the Electronic Federal Tax Payment System (EFTPS). C Corps must use EFTPS to make their payments. If a weekend or holiday falls on any of these dates, estimated taxes will be due the following business day.

Payroll Taxes

If you have employees, you’ll be required to withhold, report, and deposit payroll taxes. This includes:

• Federal income taxes withheld from employee wages.
• FICA taxes, which include Social Security, Medicare, and any additional Medicare tax.
• Federal and state unemployment taxes (paid by employer).
• State and local taxes (if applicable).

FICA taxes are equally split between employee and employer, except for the additional Medicare tax, which is only withheld from the employee’s wages.

Self-Employment Taxes

Self-employed individuals are responsible for paying the full amount of Social Security and Medicare taxes. This is known as the self-employment (SE) tax, which totals 15.3%, and is remitted with your quarterly estimated tax payments. However, you can deduct half of that amount as a business expense on your annual income tax return.

Sales Taxes

If you operate a retail business or one that sells taxable goods or services, you may need to collect and remit sales taxes. Most states require businesses to submit sales taxes every month, though some smaller businesses need only file quarterly or annually. Your due date is set by your state, so be sure to check its Department of Revenue site to determine your payment schedule. Additionally, if you sell or have a physical presence in more than one state (nexus), you may be required to file and pay sales taxes in multiple states.

Annual Income Taxes

Just like individuals, businesses must also file yearly federal and state (if applicable) income tax returns. Depending on your business structure, however, the tax forms you use and the deadline to file will vary.

Federal Income Tax Forms & Deadlines

For businesses that use a fiscal year instead of the calendar year, the federal due dates above are slightly different.

• S Corps and partnership returns are due on the 15^th day of the third month after the fiscal year concludes.
• C Corps file on the 15^th day of the fourth month after their fiscal year ends.

In instances where these deadlines fall on a holiday or weekend, the due date will be the next business day.

If your business is in a state that collects income taxes, you’ll also need to file those returns, as well. Most states follow federal deadlines, but some do vary. It’s best to check with your state’s tax agency to determine which forms must be filed and when.

Explore Deductions & Credits

It may feel like you are paying out a large portion of your business income in taxes, but there are ways to reduce what you owe. The following is a quick overview of some of the tax deductions and credits business owners can take to help reduce their tax liability. 

Deductions

• Startup Costs – In your first year of business, you can deduct up to $5,000 in startup costs, as well as another $5,000 in organizational costs. Any amount over $10,000 can be amortized over the next 15 years.
• Supplies & Equipment – Larger purchases, such as computers, furniture, and equipment, are generally eligible for a depreciation deduction. Starting in 2025, there’s also a 100% bonus depreciation that allows you to write off the full cost in the first year of service.
• Retirement Contributions – If you fund a retirement plan, such as a 401(k) or Simple IRA, you can typically deduct up to 25% of the total contributions paid to all eligible employees participating in the plan. Any ongoing administration costs and fees may also be deducted if paid from your business account and not the plan’s assets.
• Health Insurance Premiums – Most businesses can deduct 100% of healthcare insurance premiums paid for employees as a business expense, if certain conditions are met. This includes sole proprietors who establish a plan under their business and are not eligible to participate in any other employer-subsidized health plan.
• Business Vehicle & Mileage – You can deduct expenses related to the use of a business vehicle by taking either the actual expenses (gas, maintenance, insurance, etc.) or using the standard mileage rate set by the IRS.
• Home Office Deduction – If you have a dedicated area in your home that is used entirely for business, you can deduct a portion of your household expenses (mortgage, utilities, internet, etc.) using either the actual or simplified ($5 per square foot) method.
• Travel Expenses – When traveling for business, you may deduct certain expenses, including hotels, rental vehicles, airfare, and meals (50%).
• Professional Services – Fees paid to attorneys, accountants, tax professionals, and other professional services are deductible.
• Marketing & Advertising – Any expenses paid for advertising (digital, print, etc.), promotional materials, website hosting/maintenance, and other marketing services are fully deductible.

Credits

• Work Opportunity Credit – If you employ people from certain targeted groups (disabled, veterans, or long-term unemployed), you may be eligible to take a credit between $1,200 and $9,600 per employee. The credit amount varies based on the hours worked and their specified group.
• Disabled Access Credit – Eligible business owners (gross receipts under $1M and less than 30 full-time employees) may take this non-refundable tax credit (up to $5,000) if they’ve made reasonable and necessary improvements to their properties (physical & digital) to comply with the Americans with Disabilities Act.
• Research & Development Credit – This credit is available to businesses of all sizes if they meet the specific requirements (4-part test): (1) permitted purpose, (2) technological in nature, (3) elimination of uncertainty, and (4) process of experimentation. There is no set limit on the total credit amount allowed.

Stay Compliant

Once you have your business up and running, it can be all too easy to slip into bad habits that can derail your hard work. To ensure you remain compliant with your tax obligations, be sure to follow these simple tips.  

1. Keep Good Records – Knowing what’s coming in and what’s going out is essential; we suggest investing in software and tools that help you digitally maintain all necessary documentation (payroll, receipts/invoices, etc.). This also ensures you have what you need in case of fire, flood, or other natural disasters.
2. Know Your Filing Deadlines – Make sure you take note of when your local, state, and federal taxes are due.
3. File & Pay On Time – Late filing and late payments can result in unwanted penalty fees and potential collection actions, putting your business assets (and sometimes personal) at risk.
4. Work With a Tax Professional – The best way to ensure you remain compliant is to hire a tax professional to handle all your business tax filing requirements. This not only saves you time, but also stress. A tax professional can ensure you are maximizing your deductions and credits, as well as minimizing your tax liability. They are also invaluable if your business is ever audited

Final Thoughts

Running a business comes with many moving parts, but staying organized and proactive with your taxes doesn’t have to be one of the challenges. By choosing the right structure, maintaining accurate records, understanding your tax obligations, and taking advantage of available deductions and credits, you can save money and reduce stress during tax season. And remember, working with a qualified tax professional can provide the guidance and peace of mind you need to focus on what really matters – growing your business!