Understanding Basic Tax Obligations for New Businesses

Understanding Basic Tax Obligations for New Businesses

When you start a business, taxes can feel overwhelming. But skipping this step or not understanding it properly can cost you money, cause legal trouble, or even shut your business down. You don’t need to become a tax expert, but you must know the basics — what you owe, when to pay it, and how to stay compliant.

This guide gives you a clear breakdown of the three most common taxes founders deal with early on: income tax, self-employment tax, and sales tax. You’ll also learn what to do step by step, with links to helpful tools and templates to avoid rookie mistakes.

Step 1: Know the Main Types of Business Taxes

Here are the core tax categories most early-stage founders need to focus on:

  1. Income Tax
    You’ll pay taxes on the income your business earns. The rate and process depend on your business structure:

    • Sole proprietors, partnerships, and LLCs pay taxes through their personal tax returns (pass-through taxation).
    • C-Corps file a separate corporate return and pay at the corporate tax rate (currently 21%).

  2. Self-Employment Tax
    If you’re not on a company payroll (which most founders aren’t early on), the IRS considers you self-employed. You owe both the employer and employee portion of Social Security and Medicare — that’s about 15.3% of your net earnings.

  3. Sales Tax
    If you sell taxable products or services, you are required to collect sales tax from your customers and remit it to your state. Sales tax rules vary a lot by state and sometimes even by city.

Optional or less common taxes:

  • Payroll taxes if you hire employees
  • Franchise or business privilege taxes in some states
  • Excise taxes if you’re in specific industries (fuel, alcohol, air transport, etc.)

Step 2: Set Up a System to Track and Categorize Expenses

You need to know what you’re earning and spending, because taxes are calculated on your net income (total revenue minus business expenses). Here’s how:

  • Use accounting software from Day 1
    Don’t wait until tax season. Start tracking immediately using tools like:

  • Separate your business and personal finances
    If you haven’t done this yet, open a dedicated business bank account and use it only for business expenses.

  • Organize income and expenses monthly
    Get in the habit of categorizing transactions. This helps calculate your tax obligations and reduces accountant costs.

Step 3: Understand When and How to Pay

🧾 Federal Income and Self-Employment Tax

  • Quarterly estimated payments
    If you expect to owe more than $1,000 in taxes for the year, the IRS requires you to make quarterly payments.
  • Deadlines: April 15, June 15, September 15, January 15
  • Use IRS Form 1040-ES and pay via IRS Direct Pay

💳 Sales Tax

  • First, get a sales tax permit from your state’s Department of Revenue.
  • Then set up your systems (e.g. Shopify, Stripe) to automatically collect sales tax based on your buyer’s location.
  • Most states require monthly or quarterly sales tax filings.

📅 State and Local Taxes

  • Some states have business privilege or franchise taxes just for doing business.
  • Check with your state tax authority using this IRS State Tax Agencies Directory

Step 4: Prepare for Filing at Tax Time

  • Keep copies of all invoices, receipts, and bank statements

  • Work with a tax advisor who understands small businesses and startups. Use platforms like:

  • Know which tax return to file:

    • Sole Proprietor or Single-Member LLC: Use Schedule C on your personal Form 1040
    • S-Corp: File Form 1120-S and issue K-1s to owners
    • C-Corp: File Form 1120 and pay corporate taxes directly

Tips to Avoid Costly Tax Surprises

  • Don’t wait until April to think about taxes — Track and set aside money each month.
  • Set up a separate savings account to hold estimated tax money.
  • Use a tax calculator like TaxAct’s self-employment estimator
  • If you’re unsure, file for an extension using Form 4868 — but note that this gives you more time to file, not to pay.

Final Checklist

✅ Chose the correct business structure and understand how it affects tax
✅ Learned about income, self-employment, and sales taxes
✅ Applied for sales tax permit if needed
✅ Started using accounting software
✅ Separated business and personal finances
✅ Set up a system for quarterly estimated tax payments
✅ Checked for state-specific taxes
✅ Saved receipts and categorized all income and expenses
✅ Found a tax advisor or plan to use a filing service

Useful Resources

Recommended Reading

  • Small Time Operator by Bernard Kamoroff — Practical small business tax advice
  • Tax Savvy for Small Business by Frederick W. Daily — A deeper guide if you want to do it yourself