First Year Business Tax Guide

Your first year running a business is mostly about figuring out what you don’t know. Taxes are usually near the top of that list. This guide covers the things you need to get right early — before mistakes get expensive.

Get Your EIN Before Anything Else

An Employer Identification Number is your business’s tax ID. You need one to open a business bank account, file tax returns, and hire anyone. The IRS issues them online for free at irs.gov, and the whole process takes about ten minutes.

Don’t pay a service $79 to do this for you. It’s free. Apply directly.

Choose Your Entity Type Early

Sole proprietorship, LLC, S-corp, C-corp — the entity you pick affects how you’re taxed, how you pay yourself, and what paperwork you file. Most new businesses start as sole proprietorships or single-member LLCs because the setup is simpler and the costs are lower.

The decision isn’t permanent. You can form an LLC later, or elect S-corp status once your income justifies it. But starting with the wrong structure can mean overpaying self-employment tax for a year or two before you catch it. Our entity formation team walks clients through this before they file anything.

Set Up Your Books from Day One

The number one mistake we see in first-year businesses: no bookkeeping system until tax time. Then it’s January, the return is due in three months, and someone hands us a grocery bag of receipts and a bank statement they’ve never looked at.

You don’t need anything fancy. A simple spreadsheet works. QuickBooks or Wave works better. The point is to track income and expenses as they happen, not reconstruct them eleven months later. Our bookkeeping service starts at a level that makes sense for new businesses.

Quarterly Estimated Taxes

This catches people off guard every single year. If you’re self-employed, nobody is withholding taxes from your income. The IRS expects you to pay as you earn, four times a year: April 15, June 15, September 15, and January 15.

Miss those deadlines and you’ll owe an underpayment penalty — even if you pay the full amount when you file your return. The penalty isn’t huge in year one, but it adds up. Read more about why estimated payments matter.

Startup Costs You Can Deduct

Money you spent getting the business off the ground — before your first sale — is deductible, up to $5,000 in the first year. That includes market research, advertising, travel to meet potential clients, training, and professional fees. If your startup costs exceed $5,000, the rest gets amortized over 15 years.

Keep the receipts. The IRS won’t take your word for it.

Records Worth Keeping

At minimum, hold onto these:

Bank and credit card statements for every business account
Invoices you sent and invoices you paid
Receipts for anything over $75 (the IRS requires written records for expenses $75 and above, though we recommend tracking everything)
Mileage logs if you drive for business
Contracts with clients, vendors, and contractors

The IRS can audit returns going back three years — six if they suspect underreported income. Keep records for at least seven years. Digital copies are fine.

Common First-Year Mistakes

We’ve seen all of these more than once:

Mixing personal and business bank accounts (makes everything harder at tax time and weakens your LLC protection)
Forgetting to pay estimated taxes and getting hit with penalties in April
Writing off personal expenses as business expenses — the IRS knows what a “business dinner” at Chuck E. Cheese looks like
Not tracking cash income because “it’s just a few hundred dollars” (it adds up, and the 1099 your client files will tell the IRS anyway)

Key Takeaway

Year one is when your habits form. Get the EIN, open a separate bank account, track your income and expenses, and pay your quarterly taxes. Everything else is easier once those four things are in place.

Frequently Asked Questions

Do I need an EIN if I’m a sole proprietor with no employees?

You’re not strictly required to have one if you’re a sole proprietor with no employees and no plans to open a business bank account. But practically, most banks require an EIN to open a business account, and having one keeps your Social Security number off invoices and W-9 forms. It’s free and takes ten minutes — there’s no reason not to get one.

Can I deduct expenses I paid before the business officially started?

Yes. The IRS allows you to deduct up to $5,000 in startup costs in your first year of business. That covers expenses like market research, training, advertising, and professional fees you paid before making your first sale. If your total startup costs exceed $5,000, the remainder gets amortized over 15 years.

What’s the penalty for missing my first estimated tax payment?

The underpayment penalty is calculated based on the amount you underpaid and how long it was late. For first-year businesses, the penalty is often modest because the IRS gives some grace when there’s no prior-year tax liability to base payments on. But it compounds — missing multiple quarters adds up. The simplest way to avoid it is to pay 100% of your projected tax liability in four equal installments.

Should I use an LLC or sole proprietorship in year one?

It depends on your risk exposure and income level. If your work could expose you to lawsuits — consulting, events, construction — an LLC provides liability protection from day one. If you’re doing low-risk freelance work under $40,000, a sole proprietorship is simpler and cheaper to start. You can always form an LLC later when the income justifies the cost.

How long do I need to keep my business records?

The IRS recommends keeping records for at least three years from the date you filed the return. If they suspect underreported income (by more than 25%), the window extends to six years. We advise clients to keep everything for seven years to be safe. Digital copies are acceptable — you don’t need to store paper.

Work With The Reed Corporation

Starting a business and want to get the tax side right from the beginning? Our NYC CPA team helps new business owners set up their books, choose entity structure, and stay ahead of deadlines.

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