What taxes does a new business need to pay in its first year? Federal self-employment tax (15.3%), quarterly estimated income tax payments, state franchise tax (varies by state), and sales tax if you’re selling goods. Most new business owners also need an EIN, a state tax registration, and an accounting system set up before their first invoice goes out. Miss a quarterly payment deadline, and you’ll owe penalties starting at day one.
Key Takeaways
- Get your EIN before you open a business bank account – The IRS issues EINs online for free in about 10 minutes. You’ll need it for banking, hiring, and filing any business tax return.
- Quarterly estimated tax payments start the quarter you earn income – If you owe $1,000+ in federal tax for the year, the IRS expects payments by April 15, June 15, September 15, and January 15. Missing one triggers an automatic underpayment penalty.
- Self-employment tax is 15.3% on your first $184,500 of net income – That’s 12.4% for Social Security plus 2.9% for Medicare. Above $184,500, you still owe the 2.9% Medicare portion on every dollar.
- Texas has no state income tax but does have franchise tax – Businesses with revenue over $2.47 million owe 0.375%-0.75% of their Texas margin. Below that threshold, you file but owe nothing.
- Your accounting method choice in year one is permanent without IRS approval – Cash basis vs. accrual basis affects when you recognize income and deductions. Switching later requires filing Form 3115, which adds cost and complexity.
- First-year businesses can deduct up to $5,000 in startup costs immediately – The deduction phases out dollar-for-dollar once startup costs exceed $50,000. Remaining costs amortize over 15 years (180 months).
The Complete First-Year Business Tax Checklist
Every item on this list has a deadline, a cost, or both. Skip one and you’re either paying penalties or leaving deductions on the table. Here’s the full checklist in the order you should tackle it.
1. Apply for Your EIN (Employer Identification Number)
Your EIN is your business’s Social Security number. You need it before you can open a business bank account, hire employees, or file a business tax return.
How to get it: Apply online at IRS.gov. It’s free and takes about 10 minutes. You’ll get your EIN immediately at the end of the application.
When you need it: Before your first business transaction. Don’t wait until tax season.
What trips people up: Using your SSN for business transactions because you “haven’t gotten around to it.” This creates a mess when you file returns and makes identity theft easier. For a deeper look at EINs, see our What Is an EIN Number? guide.
2. Register for State Franchise Tax
If your business operates in a state with franchise tax, you need to register. Texas requires it for all taxable entities (LLCs, corporations, partnerships, and some trusts).
Texas franchise tax basics: – No tax due if annualized total revenue is $2.47 million or less – Tax rates: 0.375% for qualifying wholesalers and retailers, 0.75% for all other businesses – Annual report and payment due May 15 each year – First-year businesses file based on the period from formation through year-end
What to do now: Register with the Texas Comptroller’s office. Even if you’ll owe nothing, you’re still required to file a franchise tax report. Not filing means a loss of your entity’s good standing.
3. Get a Sales Tax Permit (If Applicable)
If you sell taxable goods or certain services in Texas, you need a sales tax permit before you make your first sale. Not after. Not when it feels like a “real” business.
Texas sales tax rate: 6.25% state rate, plus up to 2% local tax (total up to 8.25%)
You need a permit if you: Sell physical products, charge for certain digital goods, or provide taxable services like data processing, credit reporting, or debt collection.
You don’t need one if you: Sell only non-taxable services (most professional services like consulting, accounting, and legal work are exempt in Texas).
Cost: Free to apply through the Texas Comptroller. Takes 2-3 weeks to process.
4. Set Up Employment Tax Registration
Hiring your first employee triggers a separate set of tax obligations. If you’re running payroll, even for yourself as an S-Corp owner, you need to register.
Federal requirements: – Withhold federal income tax, Social Security (6.2%), and Medicare (1.45%) from employee wages – Pay employer-matching FICA (another 6.2% + 1.45%) – Deposit payroll taxes semi-weekly or monthly depending on your total liability – File Form 941 quarterly
Texas requirements: – Register with the Texas Workforce Commission (TWC) for state unemployment tax – New employer rate is typically 2.7% on the first $9,000 of each employee’s wages – No state income tax withholding (Texas doesn’t have one)
Timeline: Register with the TWC within 10 days of hiring your first employee.
5. Choose Your Accounting Method
This sounds like a minor bookkeeping detail. It’s not. Your accounting method affects your taxable income, your deduction timing, and your financial reporting.
Cash basis: You recognize income when you receive payment and deductions when you pay expenses. This is simpler and gives you more control over timing. Most small businesses and service companies start here.
Accrual basis: You recognize income when you earn it (invoice sent) and expenses when you incur them (bill received), regardless of when cash changes hands. Required for businesses with inventory (with some exceptions) or average annual gross receipts over $30 million.
Why it matters in year one: The IRS treats your first-year accounting method as your elected method. Changing later requires Form 3115 and an IRS-approved adjustment. Get it right from the start.
6. Elect Your Fiscal Year
Most new businesses default to a calendar year (January-December). That’s fine for most situations, but it’s not always the best choice.
When a non-calendar year makes sense: – Your business is seasonal and a different year-end aligns better with your revenue cycle – You want to spread out compliance deadlines (filing returns, making payments) – Your partnership agreement specifies a different fiscal year
The catch: S-Corps and partnerships generally must use a calendar year unless they can show a business purpose for a different one. C-Corps have more flexibility. Once elected, changing your fiscal year requires IRS approval.
7. Set Up Quarterly Estimated Tax Payments
If you expect to owe $1,000 or more in federal tax for the year, you’re required to make quarterly estimated payments. This is where most new business owners get caught off guard because nothing about self-employment feels like a “paycheck” with automatic withholding.
2026 quarterly due dates: – Q1: April 15, 2026 – Q2: June 15, 2026 – Q3: September 15, 2026 – Q4: January 15, 2027
How much to pay: The safe harbor is 100% of last year’s tax liability (110% if your AGI exceeds $150,000). First-year businesses without prior-year returns can estimate based on projected income.
What happens if you skip it: The IRS charges an underpayment penalty calculated quarterly. It’s not huge, but it adds up across four quarters. And it’s completely avoidable.
For a step-by-step walkthrough of estimated payments, see our Quarterly Estimated Tax Guide.
8. Maximize First-Year Deductions
New businesses can deduct certain startup and operating costs immediately. Knowing which ones reduces your tax bill in year one.
Startup cost deduction: Up to $5,000 in startup expenses (market research, training, travel to assess the business) can be deducted immediately. This phases out dollar-for-dollar when total startup costs exceed $50,000. Remaining costs amortize over 180 months.
Organizational costs: Up to $5,000 in organizational expenses (legal fees for formation, state filing fees, operating agreement costs) get the same treatment.
Section 179 and bonus depreciation: Equipment, vehicles, computers, and other business property can often be deducted in full the year you place them in service. For 2026, bonus depreciation is 100% under the OBBBA, and Section 179 lets you deduct up to the annual limit on qualifying assets.
Other common first-year deductions: – Home office (simplified method: $5/sq ft, up to 300 sq ft = $1,500) – Business mileage: $0.725 per mile for 2026 – Health insurance premiums (self-employed health insurance deduction) – Retirement contributions: Solo 401(k) up to $24,500 employee / $72,000 total, SEP IRA up to $72,000, HSA up to $4,400 (self-only) or $8,750 (family)
9. Build Your Record-Keeping System
The IRS requires you to keep records that support every number on your tax return. “I think it was around $500” doesn’t hold up in an audit.
What to keep: – All income documentation (invoices, contracts, 1099s received) – Expense receipts (anything over $75 needs a receipt; under $75 needs a log entry) – Bank and credit card statements – Mileage logs with date, destination, business purpose, and miles driven – Home office measurements and mortgage/rent documentation
How long to keep it: Generally 3 years from the filing date, but 6 years if you underreported income by more than 25%. Employment tax records: 4 years. Asset records: keep until you dispose of the asset plus 3 years.
The system that works: A dedicated business bank account, a dedicated business credit card, and accounting software (QuickBooks, Xero, or FreshBooks). Anything less and you’ll spend more time reconstructing records than the deductions are worth.
Texas-Specific Tax Obligations for New Businesses
Texas gets a lot of attention for having no state income tax. That’s true for individuals and businesses. But “no income tax” doesn’t mean “no tax obligations.”
Texas franchise tax applies to every LLC, corporation, partnership, limited partnership, and most other business entities formed or doing business in Texas. The first report is due the year after you form. New entities often qualify for the $2.47 million revenue threshold, which means no tax owed, but you still must file the report.
Texas sales tax is collected by the business and remitted to the Comptroller. Filing frequency (monthly, quarterly, or annually) depends on your sales volume. New businesses with a permit typically start with quarterly filing.
Texas Workforce Commission requires registration if you have employees. The unemployment tax rate for new employers is typically 2.7%, applied to the first $9,000 of each employee’s annual wages.
Local business permits vary by city. Dallas, Fort Worth, and other DFW-area cities may require separate business licenses or permits depending on your industry.
One advantage for Texas businesses: No state-level estimated income tax payments. You only deal with federal estimated payments, which simplifies cash flow planning.
5 Tax Mistakes New Business Owners Make
These aren’t theoretical. They come from analyzing hundreds of first-year business returns.
Mistake 1: Running the Business Through Personal Accounts
You opened a personal checking account in 2018. Now you’re depositing client payments and paying business expenses from it. The IRS sees one commingled mess. Your CPA sees 40 extra hours of work untangling transactions.
Fix it: Open a separate business bank account and a business credit card. Run 100% of business transactions through them. No exceptions.
Mistake 2: Not Paying Quarterly Estimated Taxes
You earned $80,000 in your first year and didn’t make a single estimated payment. Now you owe $22,000+ in income and self-employment tax, plus penalties. That’s not a tax bill. That’s a crisis.
Fix it: Start estimated payments the quarter you begin earning income. Even rough estimates beat zero payments.
Mistake 3: Choosing the Wrong Entity Type (Or Not Choosing at All)
Operating as a sole proprietor when your net income is $120,000+ means you’re paying self-employment tax on every dollar. An S-Corp election could potentially save you $8,000-$12,000 per year. Actual savings vary based on your income, industry, and state.
Fix it: Have a CPA analyze your entity structure before your first profitable year. The earlier you make the right election, the more years you benefit from it.
Mistake 4: Missing the Startup Cost Deduction
You spent $18,000 on market research, training, and pre-launch expenses. You didn’t deduct any of it because “the business wasn’t operating yet.” The IRS lets you deduct up to $5,000 of those costs immediately and amortize the rest.
Fix it: Track every pre-launch expense with receipts and documentation. Tell your CPA about them.
Mistake 5: Ignoring State Tax Obligations
You formed an LLC in Texas and assumed “no state income tax” meant no state obligations. You didn’t register for franchise tax, didn’t file the annual report, and now your entity is in bad standing with the Secretary of State.
Fix it: Register with your state’s tax authority immediately after formation. In Texas, that’s the Comptroller’s office for franchise tax and sales tax, and the Texas Workforce Commission if you have employees.
First-Year Tax Timeline: Month-by-Month
Here’s a condensed timeline for a business formed in January 2026:
January-March: – Apply for EIN (day one) – Open business bank account – Register for state franchise tax – Get sales tax permit (if applicable) – Set up accounting software – Choose accounting method
April: – Q1 estimated tax payment due (April 15) – Begin tracking mileage and expenses
May: – Texas franchise tax report due (May 15, first year after formation)
June: – Q2 estimated tax payment due (June 15)
September: – Q3 estimated tax payment due (September 15) – Analyze year-to-date income for entity election decisions
October-December: – Evaluate S-Corp election for following year (deadline is March 15 of the election year, but planning starts now) – Maximize retirement contributions – Purchase needed equipment before December 31 for current-year deduction
January (following year): – Q4 estimated tax payment due (January 15, 2027) – Gather records for tax filing – Issue 1099s to contractors by January 31
Download the First-Year Business Tax Checklist PDF
Want a printable version of this checklist? We’ve put together a one-page PDF with every deadline, registration, and action item from this guide. Keep it on your desk or share it with your business partner.
Download the First-Year Business Tax Checklist PDF
Enter your email and we’ll send it right over, along with reminders when key deadlines are approaching.
Frequently Asked Questions
Do I need a CPA in my first year of business? You don’t legally need one. But the first year is where the most expensive mistakes happen: wrong entity type, missed deductions, no estimated payments. A CPA who analyzes your situation before year-end can identify savings that far exceed their fees. Illustrative example based on common client profiles.
What’s the penalty for not making estimated tax payments? The IRS charges roughly 8% annual interest (the rate changes quarterly) on the underpaid amount for each quarter you missed. On a $5,000 underpayment for one quarter, the penalty is approximately $100. Small per quarter, but it compounds across four quarters and multiple years.
Can I deduct my home office in my first year? Yes, if you use a dedicated space in your home regularly and exclusively for business. The simplified method gives you $5 per square foot, up to 300 square feet ($1,500 max). The regular method lets you deduct actual expenses (mortgage interest, utilities, insurance) proportional to your office space.
When should I consider an S-Corp election? Generally when net business income consistently exceeds $50,000-$60,000. The S-Corp election lets you split income between salary (subject to payroll tax) and distributions (not subject to self-employment tax), which can potentially reduce your total tax bill. Actual results vary based on your income, industry, and state. For the full breakdown, see our LLC Filing Guide.
What records should I keep and for how long? Keep all income and expense records for at least 3 years from the date you file the return. If you underreport income by more than 25%, the IRS has 6 years. Employment tax records: 4 years. Records for assets like equipment and vehicles: keep until you sell or dispose of the asset, plus 3 years after the return that reports the disposition.
Does Texas charge new businesses any special taxes? Texas doesn’t have a state income tax, but it does have franchise tax (for businesses with revenue over $2.47 million), sales tax (if you sell taxable goods or services), and unemployment tax (if you have employees). Most new small businesses owe little to nothing in franchise tax but still must file the annual report.
Want a CPA to walk you through your first-year obligations? Get started with SDO CPA.
Related guides: – What Is an EIN Number? – Quarterly Estimated Tax Guide – File Taxes for Your LLC the First Time – Business Tax Deadlines – Starting a Business Tax Guide