First Year Business Tax Guide
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 freelancer bookkeeping guide walks through what to track and how.
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 how estimated tax payments work.
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 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 $75 documentary-evidence threshold under Treas. Reg. §1.274-5(c)(2)(iii) applies to travel, meals and listed property — not to all business expenses. We recommend tracking everything regardless)
- Mileage logs if you drive for business
- Contracts with clients 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.
Related Services
Frequently Asked Questions
What taxes does a new business have to pay in the first year?
In your first year, you’re likely dealing with several layers of tax at once. Federal income tax, self-employment tax (15.3% on net earnings up to $168,600 for 2024), and possibly state and local taxes all apply from day one. If you’re in New York City, that means federal, New York State, and NYC taxes — plus the NYC Unincorporated Business Tax if you’re a sole proprietor or partnership earning over $95,000.
What most new owners miss is the estimated tax obligation. You’re generally required to pay quarterly estimates if you’ll owe at least $1,000 in federal tax for the year. The due dates are April 15, June 15, September 15, and January 15. Skip those, and you’ll face underpayment penalties under IRC §6654 even if you pay everything in full by April. Also, your entity type — LLC, S-corp, sole prop — changes which forms you file and which taxes apply. An S-corp election, for example, can reduce your self-employment tax exposure significantly.
The Reed Corporation works through a first-year tax projection with new clients early — usually in the first quarter — so there are no ugly surprises at year-end. Getting the entity structure right from the start saves real money. If you’re not sure what you owe or when, a quick consultation can map it all out.
Do I need to make estimated tax payments in my first year of business?
Yes, almost certainly. The IRS operates on a pay-as-you-go system, and that applies to business owners just as much as employees. If you expect to owe $1,000 or more in federal income tax after withholding and credits, you’re required to make quarterly estimated payments. The 2024 due dates are April 15, June 15, September 15, and January 15, 2025. New York State has the same requirement with the same dates.
Here’s the edge case that trips people up: in your very first year, you don’t have a prior-year tax liability to base a safe harbor on. Normally you can avoid penalties by paying 100% of last year’s tax (110% if your prior AGI exceeded $150,000). But if last year you had no business income, that safe harbor might be zero — which sounds great until you realize you’re still accumulating a current-year liability that will all come due in April. The IRS can still charge penalties under IRC §6654 if you underpay during the year.
At The Reed Corporation, we calculate a realistic estimated tax schedule for first-year clients based on projected income, entity type, and deductible expenses. It’s not a one-size number — it shifts as your revenue does. We check in mid-year to adjust if things are running ahead or behind plan.
What business expenses can I deduct in my first year?
A lot, if you track them properly. Ordinary and necessary business expenses under IRC §162 are deductible — things like rent, software, professional fees, advertising, home office, and business-use vehicle expenses. In 2024, the standard mileage rate is 67 cents per mile. If you bought equipment, IRC §179 lets you deduct up to $1,220,000 in the first year instead of depreciating it over time. Bonus depreciation is at 60% for 2024 for qualified property.
The tricky part is startup costs. If you spent money before your business officially opened — legal fees, market research, pre-opening advertising — those are treated differently. Under IRC §195, you can deduct up to $5,000 of startup costs in year one (that deduction phases out if total startup costs exceed $50,000), and the rest gets amortized over 180 months. A lot of first-year owners either forget to claim these or lump them in with regular expenses, which is incorrect. Home office deductions also require the space to be used exclusively and regularly for business — courts take that seriously.
The Reed Corporation does a detailed expense review with new business clients to make sure nothing deductible gets left on the table and nothing questionable ends up on the return. Keeping clean books from day one makes this conversation a lot easier — and the deductions a lot larger.
What’s the difference between an LLC and S-corp for taxes in the first year?
By default, a single-member LLC is taxed as a sole proprietorship — all profits flow to your personal return on Schedule C, and you pay self-employment tax (15.3%) on every dollar of net income up to $168,600. A multi-member LLC defaults to partnership taxation using Form 1065. An S-corp, by contrast, lets you split income between a salary (subject to payroll taxes) and distributions (not subject to self-employment tax), which can produce real savings once net income crosses roughly $40,000–$50,000 per year.
What most first-year owners don’t realize is that an LLC can elect S-corp status by filing Form 2553 — but timing matters. The election generally needs to be made within 75 days of the start of the tax year you want it to apply. Miss that window and you’re waiting a full year. There’s also the issue of reasonable compensation: the IRS requires S-corp owner-employees to pay themselves a market-rate salary, and if you underpay yourself to dodge payroll taxes, that’s an audit red flag under IRS guidance. New York also has an S-corp filing fee based on receipts.
This is one of the most common first-year planning conversations at The Reed Corporation. The math isn’t always obvious — it depends on your income level, your self-employment tax exposure, and payroll costs. We run the numbers before making any recommendation so you’re making an informed decision, not just copying what someone else did.
When is a new business’s first tax return due?
It depends on your entity type. Sole proprietors and single-member LLCs file Schedule C as part of their personal Form 1040, due April 15. Partnerships and multi-member LLCs file Form 1065 by March 15. S-corps file Form 1120-S, also by March 15. C-corps file Form 1120 by April 15. Extensions are available — six months for most returns — but an extension to file is not an extension to pay. Any tax owed is still due on the original deadline.
First-year businesses often get caught off guard by New York State’s requirements on top of federal ones. New York requires its own business returns, and if you’re doing business in NYC as an unincorporated entity, you may owe the NYC Unincorporated Business Tax (UBT) on income above the $95,000 exemption. LLCs in New York also face a publication requirement — you must publish a notice of formation in two newspapers for six weeks — which isn’t a tax issue, but it does have a filing fee that can run $1,000–$2,000 depending on the county.
If you’re unsure which return applies to your business or when it’s due, don’t guess. The Reed Corporation handles first-year filings for businesses across all entity types and makes sure both federal and New York obligations are met on time. Starting the relationship early in the year gives us enough runway to plan, not just react.