Filing Your First Business Tax Return: What to Expect

Filing your first business tax return means choosing the right form for your entity (Schedule C, Form 1120-S, etc.), tracking deductions, and making quarterly estimated payments to avoid penalties.

Introduction to First-Time Business Taxes

Filing your first business tax return can feel like a crash course in IRS-speak. Suddenly, terms like “self-employment tax,” “Schedule C,” and “estimated payments” are on your radar.

The good news: once you understand the basics, the process becomes manageable—and even routine.

Here’s what makes filing small business taxes different from personal taxes:

• You’re not just reporting wages—you’re reporting business income and expenses.
• You may owe federal income taxes, self-employment tax, and sometimes Medicare tax.
• You need to keep business finances separate from personal. (Yes, that means a separate bank account is non-negotiable.)

If you set up your accounting system early, you’ll save money, avoid last-minute stress, and confidently breeze through tax season.

Choosing the Right Tax Form for Your Business

When it comes to your small business's first tax return, the biggest factor in your tax filing process is your business entity type. Your legal structure doesn’t just affect liability protection—it also shapes which tax forms you’ll file, how you report income and expenses, and how much federal income tax you’ll ultimately pay.

Let’s break down the most common structures and the forms you’ll need:

Sole Proprietorship (and Single-Member LLCs)

• Tax form: Schedule C (attached to your personal Form 1040)
• Best for: Freelancers, independent contractors, and very small businesses with no employees
• Why: Easiest and lowest-cost setup; all income and expenses pass through to your personal return.

Pros:

• Simple to file and operate
• No separate corporate return
• Low setup costs

Cons:

• No liability protection (unless you form an LLC)
• All profits are subject to self-employment tax (Social Security plus Medicare). For high-income taxpayers, this can push the effective tax rate above 50 percent because the 37 percent top income tax bracket combines with the 15.3 percent self-employment tax.
• Risk of being treated as a hobby: The IRS expects a business to show a profit in at least 3 out of every 5 years. If not, the IRS may classify it as a hobby, which means prior returns can be adjusted, losses may be disallowed, and back taxes and penalties may be assessed.

💡 Example: If you’re a self-employed web designer or dog walker just starting out, this is usually the default setup.

Partnerships (and Multi-Member LLCs)

• Tax form: Form 1065 + K-1s for each partner
• Best for: Businesses with multiple owners who want flexible management and pass-through taxation

Pros:

• Income “passes through” to partners
• Flexibility in dividing profits and losses
• Simple compared to corporations
• May qualify for self-employed health insurance deduction.

Cons:

• Requires a partnership agreement (to avoid disputes)
• Partners are personally liable for debts and obligations unless it’s an LLC
• Partners are considered self-employed. Members of an LLC taxed as a partnership and partners in a traditional partnership must pay self-employment tax on their share of net earnings, which increases their overall tax burden.

💡 Example: Two friends open a coffee shop together and split the profits 50/50. They’ll file Form 1065 and each report their share on their personal return.

S Corporations (S Corps)

• Tax form: Form 1120-S + K-1s for shareholders
• Best for: Small businesses making enough profit to justify payroll, or those looking to save on self-employment taxes

Pros:

• Pass-through taxation (no double tax)
• Ability to split income between salary (subject to payroll tax) and distributions (not subject to self-employment tax)
• Limited liability protection

Cons:

• Strict ownership rules (limited to 100 shareholders, all U.S. citizens or residents)
• More paperwork and payroll requirements
• Owners must pay themselves a reasonable salary (per IRS rules).
• May owe state franchise taxes. While an S corporation does not pay federal income tax on its earnings, some states charge a franchise tax or similar fee, so it is important to check your state’s requirements.

💡 Example: A single-member LLC making $100,000 in profit may elect to be taxed as an S corp to reduce self-employment taxes.

Source: IRS Fact Sheet

C Corporations

• Tax form: Form 1120
• Best for: Growing businesses that plan to reinvest profits, raise capital, or take on unlimited owners

Pros:

• Strong liability protection
• Ability to raise money through stock
• Attractive to investors

Cons:

• Subject to double taxation (corporate income + shareholder dividends)
• More complex reporting and compliance requirements

💡 Example: A tech startup planning to scale quickly and raise venture capital usually chooses a C corp for flexibility and protection.

Business Entities at a Glance: Tax Forms, Pros & Cons

How to Decide Which Form Fits You

When choosing your tax form, ask yourself:

• Do I want the simplest setup with minimal paperwork? Choose Sole Proprietor
• Am I sharing ownership with partners? Choose Partnership or Multi-Member LLC
• Do I want to save money on self-employment tax while still being small? Choose S Corp
• Do I plan to scale big with employees, investors, and unlimited ownership? Choose C Corp

Remember: You can start as a sole proprietor or single-member LLC and change your structure later as your business grows. The IRS doesn’t lock you into one path forever.

👉 Pro Tip: Whatever you choose, keep a separate bank account and track your income and expenses carefully. The form may change, but good record-keeping always pays off.

What First-Time Filers Need to Know About Federal Taxes

When filing business taxes, it’s not a once-a-year deal. The IRS uses a pay-as-you-go tax system, meaning you may need to make quarterly estimated payments instead of waiting until year-end.

Here’s the breakdown:

• Federal income taxes → Based on net profit.
• Self-employment tax → Covers Social Security and Medicare contributions. This is separate from income tax.
• Medicare surtax → Higher earners may owe additional amounts.

Example: If you’re self-employed and earn $50,000 in net profit, you’ll owe income tax plus about 15.3% in self-employment tax.

👉 Tip: Set aside at least 25–30% of your monthly income in a tax savings account. This will cushion your tax bill and make quarterly payments painless.

Source: IRS, Self-employed individuals tax center

Filing Small Business Taxes Step-by-Step

Here’s a more detailed walk-through for filing small business taxes:

1. Organize your records
2. • Use accounting software to track income and expenses.
   • Save receipts for deductible expenses like meals, travel, equipment, and office costs.
   • Record payroll if you have employees.
3. Calculate your deductions
4. • Common deductions: rent, utilities, professional services, home office, business equipment.
   • Don’t forget startup costs (up to $5,000 in your first year).
5. Decide how to file
6. • DIY with tax software if you’re a sole proprietor or single-member LLC.
   • Hire a tax professional if you have multiple owners, employees, or complex structures.
7. Complete the correct forms
8. • Sole proprietors: Schedule C
   • Partnerships: Form 1065
   • S corps: Form 1120-S
   • C corps: Form 1120
9. E-file for convenience
   The IRS recommends e-file—it’s faster, safer, and you’ll get confirmation.
10. Pay your taxes
11. • If you owe, submit payment electronically.
    • Late payments = penalties + interest.

👉 Need more time? Check out our extensions guide.

Common Pitfalls for First-Time Business Filers

First-time filers often run into preventable mistakes. Here are the big ones:

• Mixing funds: Using your personal checking account instead of a business account.
• Forgetting estimated taxes: Leads to surprise penalties.
• Misclassifying workers: Employees vs. independent contractors—the IRS cares.
• Not tracking deductions: Missing out on property, equipment, and service expenses.
• Filing late: Even with zero tax due, penalties apply if you miss the deadline.

Avoid these and you’ll keep more money where it belongs—in your business.

Record-Keeping and Audit Protection

Good record-keeping is your best defense if the IRS comes knocking. Here’s what to do:

• Keep digital copies of receipts for at least 7 years.
• Reconcile your bank account monthly and keep all bank statements for at least 7 years.
• Use accounting software (QuickBooks, Xero, or even free options).
• Document mileage and meals properly.

Think of your books as your best audit protection. If you ever face an IRS inquiry, clean records = smooth sailing.

Resources to Help You File Confidently

• IRS Small Business Tax Center (official hub for business filers).
• FileTax.com guides:
• • First-Time Filers Pillar
  • Self-Employment Taxes
  • Started School Hub

Consider professional assistance if your business has employees, payroll, or multiple owners. A good accountant often saves you more money than their fee.

Conclusion

Filing your first small business tax return doesn’t have to feel overwhelming. With the right tax form, organized records, and smart planning, you’ll stay compliant, reduce your tax bill, and maybe even save more money than you expected.

👉 Don’t wing it. Get organized today with our 📘 Business Tax Startup Checklist—your step-by-step guide to filing with confidence.