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Frequently Asked Questions About Filing Business Taxes For the First Time

business owner filing their first business tax

Starting a business is an exciting time in any entrepreneur’s life. However, the elation you may feel in seeing your vision come to life can quickly dissipate once tax season comes around. Filing business taxes for the first time can be a daunting experience.

In my over 20 years of experience as a professional accountant, I have found that business owners ask the same accounting and tax questions when first getting started. In an effort to help our clients, my team has put together this guide answering the most frequently asked questions about filing business taxes for the first time, including:

  1. How much does my business have to make before I’m required to pay taxes?
  2. How much should I put away to pay my business taxes?
  3. Will my business get a tax refund?
  4. Do I have to file taxes for my business if it made no money this year?

How much does a business have to make before paying taxes?

This is one of the first questions new business owners have about filing business taxes for the first time. Fortunately, the answer is straightforward. According to IRS tax laws, you must pay the Self-Employment tax (SE tax) if you work for yourself. This tax funds social security and Medicare, providing you with retirement, disability, and hospital insurance benefits.

If you own your own business, you are required to pay the SE tax if one of the following applies:

  1. Your net earnings from the business were $400 or more.
  2. You work for a church or a qualified church-controlled organization that elects to be exempt from social security and Medicare taxes. In this case, you must pay SE tax if you receive $108.28 or more in wages.

If either of the above points applies to you, you should also confirm you do not fall under any special rule or exception. Generally, the IRS allows exemptions to this rule for public officials like notary public fees, state and local government employees, etc.

For more information on the Self-Employment Tax, visit the IRS website here.

How much should a business put away for taxes?

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How much you pay in tax in your first year in business (and every year after) depends on your business entity type and where you live. If you live in any of the following states, you don’t have to worry about saving money to pay state income tax:

  • Alaska
  • Florida
  • Indiana
  • Montana
  • Nevada
  • New Hampshire
  • South Dakota
  • Wyoming

On the other hand, if you live in a state with a high-income tax rate, like California or New York, you want to consider putting away a few extra dollars to pay your state income tax.

Another consideration is your business entity structure. If you structured your business as an LLC, S corp, or sole proprietorship, expect to pay the same tax rate as your own personal income tax rate. If you have a C corporation, you will pay a flat rate of 21% in taxes.

To account for the differences in business structure and state-based income tax variations, we recommend saving around 30% of your business income after expenses and deductions. That should be plenty of savings to pay both federal taxes and any applicable state taxes.

Do I have to file taxes during my first year in business?

The short answer to this question is yes. If your business made more than $400 in income this year, you are required to pay taxes your first year in business. The main thing to consider when filing taxes in your first year in business is the business tax payment deadlines.

If you expect to owe more than $1,000 or more in tax, and you operate your business as a sole proprietor, partner, or S corporation shareholder, expect to make quarterly estimated payments rather than the annual payments made as a personal filer. If your business is a C corporation and you anticipate owing tax of $500 or more, you must also make quarterly estimated tax payments.

Check out the IRS guide on Estimated Taxes to learn more about their requirements.

Do businesses get a tax refund?

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Many business owners wonder if they can expect to see a tax refund in their mailbox after filing their taxes. While not as common for businesses as for personal tax filers, your small business can receive a tax refund in a few cases.

Since most business tax entities are considered pass-through, the business owner pays their federal income taxes on their individual tax return. So, if you own an LLC, sole proprietorship, or S corp, and your tax payments exceed the tax due, you can expect a tax refund just as you would with a personal tax return.

A benefit of structuring your business as a C corporation is the expectation of receiving a business tax refund. Because C corporations pay income taxes directly as a business (instead of passing through to the owner(s) personal return), they are the only entities that receive a refund to the business itself. Corporations can expect to receive a tax return only if it has paid more in estimated taxes than the tax it owes.

Do I have to file taxes if my business made no money this year?

There are several instances where a business has formed under a business entity (LLC, sole proprietorship, S corp, or C corp) but has not generated any income for the year. Whether you set up your business entity before formally opening or have ceased business operations for the year, you may still be required to file taxes even if you made no money.

Here are the specific rules for each business entity structure:

  • Single-Member LLC – there is no need to file taxes if you have no income or qualifying expenses.
  • Multi-Member LLC (partnership) – there is no need to file taxes if you have no income or qualifying expenses.
  • Sole Proprietorship – there is no need to file taxes if you have no income or qualifying expenses.
  • C Corporation – you must file an income tax return on annual taxable income unless you are exempt under section 501.
  • S Corporation – you must file an income tax return on annual taxable income unless you are exempt under Section 501.

Still, have questions about filing taxes in your first year in business? Schedule a free consultation today to speak with an expert team member. Cook CPA Group offers an array of tax preparation and planning services to help you through the business tax filing process.