Filing small business taxes for the first time: What you need to know

Filing small business taxes for the first time is easier when you follow a few key steps to understand how your business will be taxed, organize your finances, take the right deductions and stay ahead of deadlines. Once you know what to do, you can make smarter decisions and avoid surprises at tax time.

If you’re feeling unsure about where to begin, you’re not alone. Working with a trusted accountant or tax professional can help ensure you’re checking all the right boxes and maximizing your return.

Why taxes feel overwhelming for new business owners

You’re not alone if this feels overwhelming. An NFIB survey found that 37% of small business owners say income taxes for pass-through entities are their single biggest administrative burden. It’s also why 90% of small business owners used a tax professional in 2024, with 88% saying the tax code is simply too complex to navigate on their own.

As a first-time small business owner, your tax obligations depend on two key factors:

• Your business structure
• Your profits

Understanding how your business structure affects your taxes is the best place to start.

Step 1: Understand how your business structure affects your taxes

Sole proprietorship

If you’re flying solo, a sole proprietorship might be your best bet. It’s the simplest and usually cheapest business structure, making it great for independent contractors and self-employed individuals who run their business alone.

As a sole proprietor, prepare yourself for higher taxes. First, you typically have to pay a self-employment tax that adds up to 15.3% of your taxable income (12.4% for Social Security tax and 2.9% for Medicare tax).

While W-2 employees split this tax with their employer, you’re on the hook for both the employer and the employee’s share when you file small business taxes.

You’ll file Schedule C with your individual tax returns to report your business profit or loss.

Limited liability company (LLC)

An LLC offers more protection than a sole proprietorship. If your LLC runs into trouble, your personal assets (like your house or car) are protected — creditors can only come after your business assets.

LLCs are typically more complex and costly to set up than sole proprietorships, but the legal protection plus tax flexibility makes them popular with small business owners.

This structure has a few IRS-specific nuances:

• Single owner: Your LLC is a “disregarded entity,” and you’ll report income and expenses on your personal tax return (like a sole proprietorship).
• Multiple owners: You’ll file partnership tax forms.
• Electing corporate taxation: You can use IRS Form 8832 to have your LLC taxed as a corporation.

LLCs are primarily pass-through entities — the business itself doesn’t pay federal taxes; profits and losses “pass-through” to the members’ returns.

Keep in mind that each state has its own rules about forming and taxing LLCs.

C-corporation

A corporation opens doors to funding by letting you sell shares of stock. As the corporation’s owner, you’re not personally responsible for business debts or lawsuits. Plus, your business can access special tax deductions to further reduce your taxable income.

One drawback is “double taxation”: the business pays taxes on its profits, and then shareholders pay taxes on dividends.

The IRS treats corporations as separate tax-paying entities. Your business will:

• Have its own corporation tax forms
• File quarterly and annual business tax returns
• Pay estimated quarterly taxes if you expect to owe $500 or more

S-corporation

An S-corp can give you the best of both worlds: corporate perks without double taxation. You’ll get the same personal asset protection as a C-Corporation, but profits only get taxed once — when they reach your personal return.

Like an LLC, an S-corp is a pass-through entity. To qualify, you must:

• Submit IRS form 2553
• Keep shareholders to 100 or fewer
• Stick to one class of stock
• File quarterly and annual tax returns
• Pay quarterly estimated taxes if you owe $1,000 or more

Partnerships

A partnership splits both ownership and tax responsibilities between two or more people. Like other pass-through entities, the business itself doesn’t pay federal taxes.

The partnership must still file an annual return reporting gains and losses. Each partner receives a Schedule K-1 (Form 1065) showing their share of income.

Once you know how your business will be taxed, the next step is keeping your finances clean and organized.

Step 2: Separate and organize your business finances

Open a dedicated business bank account

Opening a separate bank account — even if you’re funding your business yourself — can save major headaches.

Here’s why: If the IRS has questions about your taxes, they’ll want to see itemized records. You should be able to produce bookkeeping records, including bank statements showing cash inflows and outflows, as well as receipts for major purchases.

Using personal accounts mixes personal and business transactions, making audits and deductions harder. A separate account makes this simpler:

• Clear records of income and expenses
• Easier, more accurate deductions
• Less time spent organizing receipts

It’s no surprise that 73% of small business owners say taxes are among the most time-intensive parts of running their business.

Complete your year-end accounting

Before you can tackle taxes, you need to know your numbers. Year-end accounting helps you summarize exactly how much you earned and spent.

Start by gathering:

• Bank statements
• Invoices
• Receipts
• Payroll documents

Even with software or outside help, the time commitment is real. NFIB research shows most small business owners spend more than 20 hours a year dealing with federal taxes, even when they outsource preparation.

Whether digital or paper, just make sure you have full-year records. Once you have a clear picture of your finances, you can begin identifying deductions.

Step 3: Know which deductions can lower your tax bill

Understanding tax deductions is another challenge for new owners. It’s part of why 44% of small businesses outsource compliance tasks like tax filing and payroll.

Below are common deductible expenses and what to track:

Cost of goods sold 

If you sell tangible goods, you can deduct costs such as:

• Buying inventory
• Storing materials
• Manufacturing
• Packaging and shipping

Mileage and vehicle expenses

If you drive a lot for work, you may be able to take the mileage tax deduction. You can deduct business travel using:

• The standard mileage deduction (simpler)
• Actual expenses like gas, repairs, and insurance (more complex)

Business driving may require commercial auto insurance, and premiums are tax-deductible.

Home office tax deduction

The home office deduction is based on your office’s square footage. Eligible expenses include:

• Internet and phone service
• Computer software (including accounting and tax software)
• Office furniture and equipment
• Utilities (based on your office’s percentage of home space)
• Maintenance and repairs

Your workspace must be used regularly and exclusively for business.

Check whether your homeowner’s policy covers business equipment; if not, home business insurance may be needed (and is also deductible).

Business insurance premiums 

You can generally deduct the cost of insurance necessary to operate your business, such as:

• General liability insurance: Protects your business if a customer gets hurt on your property or if you accidentally damage someone else’s property.
• Professional liability insurance: Can help cover you if a client claims your work caused them financial harm.
• Workers’ compensation insurance: Required in most states if you have employees, it can help take care of employee medical bills and lost wages if they get hurt on the job.
• Commercial auto insurance: Can help protect vehicles used for business purposes, whether it’s a delivery truck or your personal car used for business driving.
• Commercial property insurance: Can help cover your business space and what’s inside it (from computers and inventory to furniture and equipment).
• Tools and equipment insurance: This type of insurance can help protect your work tools and equipment whether they’re at your workplace, in transit or at a job site.

You may also deduct health insurance premiums if you pay for them yourself.

Payroll expenses

Payroll-related expenses — such as salaries, wages, bonuses, benefits and employer-paid taxes — are typically deductible.

Start-up costs 

Getting your business off the ground isn’t cheap, but the IRS allows up to $5,000 in first-year start-up deductions, including:

• Market research
• Employee training
• Equipment
• Office supplies
• Legal and accounting fees
• Business licenses

Keep receipts for all business purchases — even before opening your doors.

Step 4: Decide whether to pay taxes quarterly or annually

For new business owners, tax payments often feel more burdensome because you’re responsible for the employer’s and the employee’s shares.

That’s why quarterly payments are often recommended. In fact, the IRS may require quarterly payments in some situations.

Quarterly payments can help:

• Avoid large annual tax bills
• Manage cash flow
• Reduce risk of underpayment penalties

Step 5: Know your tax filing deadlines

Missing IRS deadlines can result in costly fees and interest charges on your tax bill. To stay on track:

• Mark quarterly and annual due dates
• Prepare tax forms early and confirm whether you can file online
• Create a dedicated space (physical or digital) for documents
• Track expenses throughout the year

If you’re just starting your business, plan your tax record-keeping system early. Consulting a certified professional accountant (CPA) or licensed tax professional can help ensure you’re taking the right steps and maximizing deductions.

How NEXT helps small businesses grow

NEXT has helped more than 1,300 types of small businesses find the right business insurance at an affordable price.

Our easy online tools can help you get a quote, buy coverage and secure your certificate of insurance in about 10 minutes. Plus, you can access your account anytime to review coverage and adjust it as your business grows.

Start a free quote with NEXT today.

NEXT does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.