How to Manage Taxes as a First-Time Business Owner

As a first-time business owner, you’re likely feeling a mix of excitement and overwhelm as you embark on your new journey. 

But before you get too lost in visions of soaring profits and happy customers, there’s a crucial aspect that demands your attention: taxes. 

Managing your tax responsibilities might not be the most glamorous part of running a business, but it’s essential for keeping your venture thriving.

Our Total Compliance Max package does just that!

We handle the 2 most important annual compliance filings for your company, state and federal tax filing, required to keep your business 100% compliant.

In this blog, we’ll break down tax management into bite-sized pieces to help demystify the process — arming you with practical tips and insights that will turn fear into confidence. 

So grab your favorite beverage, settle in, and let’s transform taxes from an intimidating hurdle into just another stepping stone on your road to success!

Basics of Business Taxes: How to Manage Taxes

New entrepreneurs need to educate themselves about taxes that may apply based on their specific business structure and operations.

Neglecting any type could lead to penalties or missed opportunities for deductions or credits that could lower your overall tax burden.

So, first and foremost, you must understand that businesses are subject to various types of taxes at the federal, state, and local levels. 

Here are some key types of taxes that every business owner should be aware of:

1. Income Taxes

Income tax is a type of tax levied on the taxable income generated by businesses.

This includes profits from sales, services, and other sources such as interest and dividends. 

The amount of income tax you pay depends on your business structure (sole proprietorship, partnership, corporation) and income level.

2. Self-Employment Taxes

If you are self-employed or own a small business with no employees, you will also have to pay self-employment taxes in addition to regular income taxes. 

These include Social Security and Medicare taxes based on a percentage of your net profit.

3. Sales Taxes

Sales tax is levied on goods and services sold by businesses to consumers and varies depending on the location where the sale was made. 

As a small business owner, it is important to understand if you are required to collect sales tax from customers and how much needs to be remitted to the state.

4. Employment Taxes

If your business has employees, filing employment taxes should be one of your top priorities. 

These include federal payroll taxes such as Social Security and Medicare contributions, unemployment insurance contributions, and federal income tax withholding.

5. Gross Receipts Tax

Some states impose a gross receipts tax instead of a traditional corporate or personal income tax. This tax is calculated based on a business’s total revenue rather than its profit margin.

Furthermore, depending on your income and tax liability, you may also need to file estimated taxes quarterly as a business owner. 

These estimates help ensure that you are paying taxes throughout the year rather than a lump sum at the end of the year.

Get a CPA consultation from an expert who can provide vital guidance and support in navigating the complexities of tax laws and regulations.

Choosing the Right Business Structure for Tax Purposes

The type of business structure you choose will determine how much you pay in taxes and how you report your income to the government.

The most common types of business structures are sole proprietorship, partnership, limited liability company (LLC), S-corporation, and C-corporation. 

Sole Proprietorship

This is the simplest form of business structure where a single individual owns and operates the entire business. 

In sole proprietorship taxes, all profits and losses are reported on your personal income tax return through Schedule C. 

While this structure may seem appealing due to its simplicity, keep in mind that you are personally liable for any debts or legal issues incurred by your business.

Partnership

Two or more individuals share ownership in this type of structure. Each partner reports their share of profits or losses on their tax returns through Schedule K-1. 

Similar to sole proprietorship, there is no legal separation between personal and business assets in a partnership.

Limited Liability Company (LLC)

Setting up an LLC offers limited liability protection to its owners while still allowing them to report profits and losses on their tax returns. This structure combines the flexibility of a partnership with some benefits of a corporation.

S-Corporation 

An S-corporation is similar to an LLC regarding limited liability protection; however, it follows more formal procedures when it comes to management decisions and conducting meetings. 

The major advantage of an S corporation is that, unlike the other structures mentioned above, only the owner’s salary is subject to self-employment tax, not the entire business income.

C-Corporation (C-Corp) 

In a C-corp, the business itself is separate from its owners, meaning it pays taxes on its profits. 

As an owner of a C-Corp, you are considered an employee and receive a salary subject to employment taxes. 

This structure offers the most significant liability protection for its owners but also has more complex tax filing requirements.

Setting up a System to Track Income and Expenses

Step 1. Choose a Reliable Software or Accounting System

The first step in setting up a system to track income and expenses is choosing reliable software or an all-in-one bookkeeping and accounting system. 

This system allow you to automatically import all your financial transactions, such as sales, purchases, and expenses, in one place. 

They also offer features like categorizing transactions for easy organization and generating reports for tax purposes.

Step 2. Separate Business and Personal Finances

It is essential to keep your business finances separate from your finances.

Having separate business bank accounts will make it easier to track income and expenses accurately without any confusion.

Step 3. Keep Accurate Records

Maintaining accurate records is crucial for tracking income and expenses and preparing for taxes. 

Proper documentation for all financial transactions, including receipts, invoices, bank statements, etc., must be maintained.

Step 4. Create a Chart of Accounts

A chart of accounts provides a detailed breakdown of all the categories in which your business’s money is spent or earned. 

This can include sales revenue, cost of goods sold (COGS), operating expenses such as rent or utilities, etc. 

Creating a chart of accounts helps organize all the different types of transactions, making it easier to prepare taxes.

Step 5. Develop an Organizational System

Whether you prefer physical ledgers or digital bookkeeping systems, having an organizational system in place is essential when managing taxes as a new business owner. 

Make sure to have specific folders designated for essential documents such as receipts, bank statements, and tax-related documents.

Step 6. Set Aside Funds for Taxes

To ensure you have enough funds to cover these expenses, it is recommended that you set aside a certain percentage of each sale or payment received for taxes.

Remember to stay organized and keep accurate records throughout the year for hassle-free tax preparation.

Common Tax Deductions for Small Business Owners

One aspect that can significantly impact your tax liability is deductions. They are expenses that you can deduct from your taxable income, ultimately reducing the overall amount of taxes you owe. 

Taking advantage of these standard tax deductions can maximize small business owners’ tax savings and help them keep more money in their pockets.

💰 Home Office Deduction

If you operate your business from a home office, you can deduct a portion of your rent or mortgage, utilities, insurance, and other expenses related to operating your business from home.

💰 Business Vehicle Expenses

If you use a vehicle for business purposes, such as meeting with clients or making deliveries, you can deduct certain expenses associated with its use. 

This includes gas, maintenance and repairs, insurance premiums, and even lease payments in some cases.

💰 Supplies and Equipment

The cost of supplies and equipment essential to running your business is also deductible. This can include office supplies like paper and pens or larger purchases like computers or machinery.

💰 Employee Salaries

As an employer, any wages paid to employees are considered deductible expenses. This includes salaries, bonuses, and benefits such as health insurance contributions or retirement plan contributions.

💰 Professional Services

Fees paid to lawyers, accountants, or other professional services needed to run your business are also considered tax-deductible expenses.

💰 Self-Employment Taxes

Self-employed individuals are responsible for paying self-employment taxes, which fund Social Security and Medicare programs; however, part of this expense is deductible from personal income taxes.

💰 Advertising & Marketing Costs

Advertising is essential for growing a successful small business; fortunately, many advertising costs, including print ads and online ad space fees associated with creating marketing materials, all count toward deductible expenditures

💰 Educational Expenses

You can deduct the cost of educational expenses incurred by taking courses, attending workshops, or attending conferences related to your business. 

This is especially beneficial if they help improve your skills and knowledge in operating your business.

Apart from these common deductions, you can also claim deductions for expenses that are necessary to operate your business. 

Consult one of our expert CPAs to ensure that you are taking full advantage of these deductions without running into any discrepancies with the IRS.

What Are Quarterly Estimated Taxes? 

Quarterly estimated taxes are tax payments made by small business owners to the IRS on a quarterly basis. 

These payments help business owners stay ahead of their annual tax liability and avoid facing penalties from the IRS.

Calculating your estimated tax payment amounts can be done using one of two methods:

• Regular Installment Method

• Annualized Income Installment Method

The regular installment method involves estimating your total annual income and deductions and dividing them by four to determine your quarterly payment amount. 

On the other hand, the annualized income installment method takes into account fluctuations in income throughout the year rather than assuming an equal amount each quarter.

The due dates for quarterly estimated tax payments are April 15th, June 15th, September 15th, and January 15th of the following year.

Once you have calculated your estimated tax payments, you can make them online through the Electronic Federal Tax Payment System (EFTPS) or mail in a check with Form 1040-ES. 

Sales Tax: What You Need to Know

The first thing you need to know about sales tax is that it varies from state to state.

Each state has its own rules and regulations regarding sales tax rates, exemptions, and filing procedures.

In most states, businesses are required to collect sales tax if they have a physical presence in that state, such as a storefront or office. 

However, in some cases, even online businesses may be required to collect sales tax if they do business in that state.

Once you have determined whether or not you need to collect sales tax for your business, it’s time to register for a permit with your state’s taxing authority. 

This permit allows you to collect sales taxes from customers legally and provides information on how often you are required to file returns and pay any owed taxes.

Self-Employment Taxes: What to Expect

Self-employment tax consists of two parts: the Social Security tax and the Medicare tax.

The Social Security tax is at 6.2% on net self-employment income up to a limit of $176,100 for 2025. 

This means that you will only pay Social Security tax on your earnings up to this amount. Any income above this limit will not be subject to Social Security tax. 

The Medicare tax is a 1.45% flat-rate tax for 2025 on all net self-employment income with no upper limit.

As a sole proprietor earning more than $400 annually from self-employed work, you are required by law to file an annual return using Schedule SE (Form 1040) with your federal income tax return. 

It’s important to keep in mind that self-employment taxes are in addition to federal and state income taxes. 

So, you must also make estimated tax payments quarterly throughout the year based on your expected annual earnings.

Hiring a Tax Professional vs. Managing Taxes Yourself

With so many rules and regulations to follow, you may be torn between handling your taxes yourself or hiring a professional. 

Let us help you with the pros and cons of each option — working with a Certified Public Accountant (CPA) or using tax software — to help you make an informed decision.

Pros of Working With a CPA

One of the main advantages of hiring a CPA is their expertise in tax laws and regulations. This can save you time and effort in researching and ensuring compliance on your own.

They are trained professionals who stay current on changes to the tax code and can provide accurate guidance for your business. 

Another benefit of working with a CPA is their ability to maximize deductions and credits for your business. 

As they have a thorough knowledge of the intricacies of tax laws, they can identify potential savings that you may have overlooked if you were managing taxes yourself.

Additionally, having a CPA on board can give you peace of mind, knowing that your taxes are being handled correctly. 

They are accountable for any errors made on your tax returns, which can save you from potential penalties or audits from the IRS.

Cons of Working With a CPA

However, hiring a CPA also has its drawbacks. The biggest con is cost – CPAs charge high fees for their services, which may not fit every business budget. 

You will also need to allocate time for meetings with them throughout the year, which may not be feasible if you have a busy schedule.

Pros of Using Software

One of the main perks of using bookkeeping software is its affordability compared to hiring a CPA. 

They offer different pricing plans based on your needs, and some even offer free demos for simple tax situations.

Tax software also eliminates human error as it performs reconciliations automatically and alerts users about any missing information before filing. This can give you confidence in the accuracy of your tax returns.

Additionally, using software can save you time, as it has built-in features that make organizing and filing taxes more efficient. 

You also have control over when and where to file your taxes, making it convenient for busy business owners.

Cons of Using Software

However, relying solely on software has its downsides as well.

As these programs are not experts in tax laws, they may miss potential deductions or credits that a CPA could identify. 

Also, if you are not tech-savvy or familiar with tax laws, using software may be overwhelming or take away a large chunk of your time.

Avoiding Common Tax Mistakes as a First-Time Business Owner

⚠️ Not keeping Financial Records

One common mistake that many first-time business owners make is failing to keep accurate and organized records, which could result in improper deductions or overpayments on taxes. 

Without proper record-keeping, it becomes difficult to accurately track income and expenses, which are essential for filing taxes correctly. 

⚠️ Misclassification of Employees

Another red flag to watch out for is incorrectly classifying employees as independent contractors. 

With the rise of freelance work, it’s easy for new business owners to mistakenly label certain workers as contract labor instead of employees. 

However, misclassification can lead to significant tax implications such as back taxes, penalties, and interest payments. 

Understanding the difference between an employee and an independent contractor is vital in avoiding this mistake.

⚠️ Not Separating Business and Personal Expenses

Additionally, mixing personal expenses with those related to your business not only creates confusion but can also raise red flags during an audit. 

It’s crucial to have separate bank accounts and credit cards for your personal use and business operations.

Furthermore, not keeping up-to-date with tax laws and regulations can result in costly mistakes for first-time business owners. 

Make sure you stay informed about any changes that may affect your specific industry or type of business.

Year-End Tax Preparation Checklist

To help you stay on track, we have compiled a year-end tax preparation checklist:

✔️ Organize and categorize all your financial documents, including bank statements, receipts, and invoices.

✔️ Ensure that all income and expense transactions are accurately recorded in your accounting software before starting the tax preparation process.

✔️ Take the time to reconcile your business bank accounts to ensure that there are no discrepancies between your records and what the bank has recorded.

✔️ Create an accurate profit & loss statement by categorizing all revenue and expenses for the year.

✔️ If you have hired any independent contractors or received payments from clients over $600 throughout the year, make sure to gather their 1099 forms for reporting purposes.

✔️ If your business collects sales tax from customers, review your sales tax liabilities to ensure they match with what has been reported.

✔️ Look into potential deductions such as home office expenses or equipment purchases that can reduce your taxable income.

✔️ Consider contributing to a retirement account before the end of the year to reduce taxable income while saving for the future.

✔️ Ensure all employee information is up-to-date, including Social Security numbers and withholding so that W-2s can be prepared correctly.

✔️ Make sure payroll taxes have been accurately calculated and filed before year-end deadlines to avoid penalties or interest charges from the IRS.

✔️ Be aware of specific dates regarding returns due on unsecured personal property tax deductions.

✔️ Schedule a meeting with a tax professional to ensure all tax requirements for your specific business structure have been met and to get expert advice on any potential deductions or credits.

✔️ Remember to file your small business taxes by the appropriate deadlines to avoid penalties and interest fees.

Seek guidance from professionals, and don’t hesitate to reach out if you have any questions or concerns about managing your taxes as a new business owner.

Manage Your Tax Obligations With doola Total Compliance Max

With numerous forms, deadlines, and regulations to keep track of, managing your tax requirements on your own can quickly become a daunting and time-consuming task.

This is where doola Total Compliance Max comes in to help simplify and streamline the tax process for small business owners like yourself. 

From essential tools that can help you start a business with ease to keep it compliant with all the legal and tax obligations, we got everything covered.

This includes BOI filings, CPA consultations, state and IRS tax filings, and a dedicated bookkeeper for accurate financials and peace of mind.

Whether it’s income tax returns or sales taxes, our experts will ensure that these forms are accurately completed and submitted on time, minimizing your chances of facing any penalties or fines.

Furthermore, our service goes beyond just filing forms and meeting deadlines. We provide ongoing support throughout the year whenever questions or concerns arise regarding your tax obligations. 

Book a CPA consultation for expert guidance and comprehensive support, you can focus on growing your business while we handle the complexities of taxes to ensure full compliance.