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Taxes in Your First Year of Business

The first year sets the tax structure for the next decade. Entity choice, accounting method, and retirement plan all start here.

Katie Gorles
Written by
Katie Gorles
Updated July 6, 2026

First-year decisions

These affect years of returns, not just the first:

  • Entity type (Schedule C, LLC, S-corp, C-corp)
  • Accounting method (cash or accrual)
  • Fiscal year (calendar or specific fiscal year-end)
  • Startup cost deduction vs. amortization
  • Quarterly estimated payment schedule
  • Retirement plan (Solo 401(k), SEP, SIMPLE, Defined Benefit)
  • Health insurance deduction strategy

The self-employment tax surprise

Profit from a sole proprietorship or single-member LLC carries 15.3% self-employment tax on top of income tax, and nobody withholds it for you. The first year's classic disaster is spending the revenue and meeting the combined bill in April. Quarterly estimated payments start the first quarter you have profit, and a working rule of setting aside a quarter to a third of net income keeps the estimates funded.

Startup cost deduction

Up to $5,000 of startup costs are deductible in year one; the rest amortized over 15 years. Organizational costs (attorney fees for LLC formation, corporate filing fees) get the same treatment. Costs incurred before the doors open, market research, training, pre-opening advertising, are what these rules cover; once the business is operating, ordinary expenses just deduct normally.

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Records that survive an audit

A dedicated business bank account and card, opened in month one, does more for audit defense than any software subscription. Commingled personal and business spending is the single thread examiners pull hardest. Add a contemporaneous mileage log if you drive for the business and receipt capture for anything over a trivial amount, and the year-end scramble mostly disappears along with the audit exposure.

Deductions first-year owners miss

The home office deduction, when a space is used regularly and exclusively for the business. Self-employed health insurance premiums, deducted above the line. The business-use share of phone and internet. And retirement contributions: a Solo 401(k) or SEP IRA can shelter a large slice of first-year profit, with SEP contributions allowed as late as the extended filing deadline.

Common questions

When should I form an S-corp?
Typically once net income consistently exceeds $45,000. Form too early and payroll costs exceed savings.
Do I need an LLC before I can deduct expenses?
No. Business deductions follow the activity, not the entity. A sole proprietor on Schedule C deducts the same ordinary and necessary expenses; the LLC question is about liability and later tax elections.
How much should I set aside for taxes?
A quarter to a third of net profit is the standard starting point, refined after the first quarterly calculation. Florida's lack of a state income tax makes the math friendlier here than in most states.
What happens when I hire my first employee?
Payroll changes everything: an EIN, federal withholding and deposits, quarterly 941s, Florida reemployment tax, and new-hire reporting. Payroll mistakes carry some of the steepest penalties in the tax system, so set it up properly before the first paycheck.

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