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How to Get Through Your First Tax Season as a Small Business Owner

August 3, 2022
Phil Cohen


Your first tax season as a new business owner can be stressful. There are many aspects to know and remember so that you file correctly with the IRS. Reduce your stress level by doing research so you know what to expect during your first tax season.

Surviving Tax Season

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How to File Your First-Year Business Taxes

One of the first steps to filing your taxes when starting a business is obtaining your employer identification number or your EIN. An EIN is a unique nine-digit number that the IRS uses to identify your business for tax purposes, it’s essentially your businesses social security number. Your EIN is required for things like opening a business bank account, filing your tax returns and applying for business licenses. Business owners should apply for one as soon as possible when starting a business. You can apply for an EIN directly through the IRS website, at no cost to you. Not all business owners need an employer identification number if you are a sole proprietor you are not required to obtain an EIN.

It’s important to stay organized while gathering all the necessary documents needed to file your federal and state taxes. Your federal taxes are those you pay to the IRS and they are determined by the type of business entity that you have established. Be sure to fill out the right tax form from the IRS based on your type of business entity.

If you are a sole proprietorship, partnership or LLC your taxes will include:

  • Income tax
  • Self-employment taxes (Social Security and Medicare)
  • Estimated tax (pay-as-you-go tax)
  • Employer tax (such as withholding tax)
  • Excise tax

Small business tax reporting also includes filing your state income and employment taxes. As with federal taxes, your state income taxes also are determined by the type of business entity you are. Income tax filings require LLCs to be taxed separately from the owner and sole proprietors report their personal and business income taxes on the same form. Each state has different requirements and the US Small Business Administration has information pertaining to each state. Also, be aware of state employment taxes. If you have employees working for you, it’s required that you pay state employment taxes including workers’ compensation insurance and unemployment insurance taxes.

Choosing between Cash or Accrual

When preparing your first tax return, the IRS allows small business owners to choose whether they want to file on the cash or accrual basis.

Under the cash basis:

  • Income is documented when collected
  • Expenses are documented when paid
  • Some businesses with large revenues cannot choose the cash basis

Under the accrual basis:

  • Income is determined when earned and expenses are determined when in incurred
  • Most common financial statements
  • Lenders prefer the accrual basis

It’s possible to prepare your tax returns on the cash basis even if your financial statements are prepared on the accrual basis. Once you start, you are able to use either method but if you desire to change in the future, you must gain approval from the IRS.

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Small Business Tax Help

Once you have the basic research done on the specifics of small business tax reporting you can focus on reducing stress. Here are some general tips to ensure success while doing your first-year business taxes:

Stay organized

Organization is important for small business owners when filing a business’s taxes for the first time. Be sure to keep your business taxes separate from your personal. Confusing the two can create major headaches. Also, stay organized by keeping track of certain paperwork throughout the year in preparation for tax season. Searching for certain receipts last minute will only cause you problems. Keep these items safe for easy retrieval when needed.

Take advice from a professional

It’s likely that you’ve never filed a tax return for a business before, in this case, it’s helpful to seek advice from a professional. IRS requirements can be confusing and are always changing, tax professionals are aware of these changes and will guide you through the process. If you’re worried about the cost of seeking professional help, you may be able to use online services and apps for a lesser fee.

Start the tax preparation process early

It’s helpful to start the tax process early in the year. If you run into a problem or need to seek help, you won’t be worried about missing any deadlines. Start your process early and use checklists to stay on track with IRS deadlines.

Be aware of tax law changes by the government

Every year there are new laws and legislation regarding taxes. Be sure to check what’s new each year before filing your tax return. The IRS posts the changes each year on their website for reference.

Keep records

Keep all receipts, credit card statements and other necessary records throughout the year so when it comes time to file your taxes you have everything you need handy. It will cost you time and money to have to dig through old paperwork and make phone calls to find these items.

Use apps

As mentioned earlier, using tax apps can answer questions you may have and can help you file your taxes more easily. Some of the top tax apps this year are:

Staying on top of tax season will ensure your success. Use these tax tips during your first tax season to familiarize yourself with the IRS’s requirements and you’ll be a professional in no time!

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