You started a business in the last year — awesome! Congrats on your new venture. CFO2U started with a passion for small businesses and the entrepreneurs who run them, and we love to see ambitious people bring their passions to life.
We are here to support you as you launch and grow your new business, and that means talking to you about your taxes.
Tax Advice for New Small Business Owners
If this is your first year doing taxes as a business owner, you might be confused and anxious. It’s totally normal. Dealing with business taxes can seem intimidating at first, but we are here to help.
Here are seven things you know about taxes as a new business owner. This advice will help you file the correct documentation, pay the correct amount, and avoid fines, fees, and audits.
1. Your business classification might be different from your tax classification.
The difference between business classification and tax classification can confuse many new business owners. Most think that these designations are one in the same, but in some cases, they may be different.
A business classification is how your company is legally structured. It affects ownership, liability, and how you report income. Businesses may be set up as a:
- Sole proprietorship
- LLC
- Partnership
- S-corporation
- C-corporation
A tax classification is how your business is taxed by the IRS. It affects tax rates, filing requirements, and legal obligations. Tax classifications include:
- Individual/Sole proprietor
- Partnership
- S-corporation
- C-corporation
While the types of business classifications and tax classifications share similar names, they do not automatically connect to each other. Your business classification could be different from your tax classification.
For example, a business structured as an LLC could be taxed as an individual/sole proprietor, partnership, or S-corporation or C-corporation.
In your first year of business, talk to a tax accountant to make sure you know your correct filing status. They can advise you if you should change your tax classification to provide the best tax benefits for your business.
Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make
2. You may owe multiple types of taxes.
Businesses may owe more than income tax. Depending on how and where your business operates, you may have multiple tax obligations. Here are a few examples of the types of taxes you may be obligated to pay.
- For-profit businesses must pay federal income tax.
- For-profit businesses may also need to pay state and/or local income tax.
- Depending on tax classification, some business owners may need to pay self-employment tax.
- Businesses that have employees must pay payroll tax.
- Businesses that sell products may need to pay sales tax.
If this is your first year of business, make sure you understand all of your tax obligations. Not knowing that you must pay taxes is not an excuse for not paying them. Not paying could lead to penalties and interest on unpaid taxes. Talk to a tax account to ensure you know all of the taxes you need to pay.
Non-profits have different tax requirements, so be sure to talk to a professional about unique obligations and requirements.
Related: What Type of Accounting Does Your Business Need?
3. You need to pay taxes all year.
Individuals who work for traditional employers have taxes taken out of their paychecks all year. They don’t have to worry about making tax payments on their own. Business owners do.
Certain businesses must pay quarterly estimated taxes. You cannot wait until tax time to make a lump sum payment.
C-corporations are required to pay quarterly taxes if they are profitable, and business owners of S-corporations, sole proprietors, and partnerships need to pay estimated taxes on their portion of the businesses profits.
While you won’t know until you file your taxes how much you owe, make a reasonable estimate and pay that amount. A good estimate is 30% of your income. To get a more accurate estimate, work with a tax accountant who can use your bookkeeping records to calculate an accurate quarterly payment amount.
Related: Want to Avoid a Surprise Tax Bill? Do This Right Now.
4. You need to send tax documents to workers and government agencies.
If your business hires help, you have tax documents to file and share with your workers and U.S. government agencies.
You must send tax forms to hired help by January 31.
- W-2s to employees
- 1099-NECs to contractors (if you paid them $400 or more)
You must also send tax forms to U.S. government agencies such as the IRS, Social Security Administration, state tax agencies, etc. Some forms may include, but are not limited to:
- Copies of all employee W-2s
- Form 941 (Employer’s Quarterly Federal Tax Return)
- Form 940 (Annual Federal Unemployment Tax Return – FUTA)
- Form 1096 (Annual Summary of 1099 Forms)
A tax accountant can advise on what documents must be submitted to both hired help and government agencies.
Related: Freelancing and Taxes: The Tax Guide for Side Hustles
5. Not all taxes are due on April 15th.
Most individuals know April 15 as tax day. This is also true for some businesses but not all.
S-corporations and partnerships must submit their tax returns on March 15. If your tax classification is one of these designations, file on or before March 15 to avoid penalties and fees.
Related: Add These Important Tax Deadlines to Your Calendar
6. Track all of your expenses and income.
Tracking your expenses and income isn’t just good business management; it is critical financial management.
Track expenses big and small. Many expenses your business has are deductible, which means they can reduce the amount of taxes you owe. Don’t overlook any expenses. Track them to ensure you get every small business tax deduction available to you.
Track all income. Misrepresenting your income can have severe consequences. If you overstate income, you could be left with a higher tax liability. If you understate your income, you could be hit with costly fines and fees and even criminal charges If the IRS believes the underreporting was intentional.
Use small business bookkeeping best practices to keep accurate records of both income and expenses.
7. Strong bookkeeping systems will make tax time much, much easier.
We work with a lot of small, new, and growing businesses at CFO2U, and one thing most of these businesses wish they did from the start is establish good bookkeeping practices.
Good books are good business. Starting with a solid bookkeeping system not only sets a strong foundation for your business to survive and thrive, but it also makes tax time a breeze.
When you have a consistent, monthly bookkeeping system, you won’t have to scramble to create reports at tax time. You can easily create reports that expedite your tax filings and make it easy to complete your returns.
Set Your New Business Up with Strong Tax Systems
Starting a new business is an exciting venture. We are excited you have set out on this new venture, and we are here to help you along the way.
Financial mismanagement is one of the number one reasons why businesses fail. New companies frequently don’t know how to manage cashflow, create accurate financial reports, and use tax planning strategies that benefit their business.
Don’t fall into this trap. Start smart and implement these systems to lead your business to financial success. And if you need help, we’re here.
Talk to our team about our monthly bookkeeping programs and tax services that provide the support and expertise to help your new business thrive. Let’s talk. Schedule a free consultation with our team today.
- You Started a Business. Here’s What You Need to Know About Taxes - February 28, 2025
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- Freelancing and Taxes: The Tax Guide for Side Hustles - January 30, 2025
