Tax

1. 1

   Federal tax setup

   Set up your federal tax side with an EIN from IRS.gov and a clear answer on how your business is taxed. A single-member LLC is taxed like a sole proprietor by default, a multi-member LLC like a partnership, and either can elect to be taxed as an S corporation or C corporation if that fits.

   Your accountant can tell you which treatment saves the most after costs. Keep a W-9 filled out with your legal name and EIN to send customers who ask. Create an IRS business online account so you can see notices, payments and balances in one place.

   • Get your EIN at no charge on IRS.gov
   • Confirm your tax treatment with an accountant
   • Fill out a W-9 to send customers
   • Set up your IRS online business account
2. 2

   Tax year and method

   Choose your tax year and accounting method when you file your first return, with your accountant's help. Most small businesses use the calendar year. The method is usually cash, where you count income when paid and expenses when you pay them, or accrual, where you count them when earned or billed.

   Cash is simpler and common for small service businesses, but some businesses must use accrual, especially those carrying inventory or with larger sales. Changing later can take IRS approval, so pick carefully. Set your accounting software to match the method your accountant chooses.

   • Ask your accountant about cash or accrual
   • Pick a tax year before your first return
   • Set your software to the same method
   • Write the choice down in your records
3. 3

   Federal payments and filings

   Pay federal income tax through the year with quarterly estimated payments if your business does not withhold tax for you. Owners of sole proprietorships, partnerships and many LLCs usually pay estimated tax on their share of profit, including self‑employment tax.

   Make payments through IRS Direct Pay or EFTPS and save each confirmation. File your annual return on the form that fits your structure, such as Schedule C with your personal return, a partnership return or a corporate return. Move a set percentage of every customer payment into a separate tax savings account, using the rate your accountant suggests.

   • Ask your accountant for an estimate amount
   • Pay quarterly through Direct Pay or EFTPS
   • Save part of every payment for taxes
   • File the return for your entity type
4. 4

   State and local taxes

   Register with your state tax agency for each state tax that applies, which can include income tax, franchise tax, sales and use tax and withholding. A few states have no personal income tax, and some cities and counties add their own business or income taxes.

   Ask your state tax agency and your accountant which taxes fit your business and location. Many states let you register for several taxes in one online application. If you work in more than one state, you may owe tax in each one. Keep each account number and login on your requirement matrix.

   • Register with your state tax agency
   • Ask about city and county business taxes
   • Check tax rules in each state you work in
   • Record each tax account number
5. 5

   Sales tax details

   Find out whether what you sell is taxable in each state where you sell it. States tax goods differently from services, and some services are taxed in one state and not the next. Contractors often pay sales or use tax on materials rather than charging it. In Idaho, for example, contractors who improve real property pay tax on their materials and charge none on the job, unless they sell materials they do not install.

   If you must collect, get a seller's permit, charge the correct rate, keep exemption certificates from tax-exempt buyers and file returns on the schedule the state sets. Online sales into other states can create a duty to collect there, too. Ask your accountant to confirm.

   • Check which of your sales are taxable
   • Get a seller's permit if you must collect
   • Set the right rates in your invoicing tool
   • Keep exemption certificates on file
6. 6

   Payroll accounts

   Before you pay your first employee, open payroll tax accounts with your state for income tax withholding, if your state has it, and for state unemployment insurance. Report each new hire to the state new hire registry as required.

   Collect a W-4 and an I-9 from every new employee before or on the first day, and check your state for its own withholding form. Federal payroll deposits go through EFTPS. A payroll service or payroll feature in accounting software such as QuickBooks or Gusto can calculate, deposit and file for you, which cuts down on costly mistakes.

   • Open state withholding and unemployment accounts
   • Collect a W-4 and I-9 from each hire
   • Report new hires to the state registry
   • Choose a payroll service or software
7. 7

   Payroll and contractor filings

   File payroll tax returns and contractor forms on time every quarter and year. For employees that usually means federal Form 941 quarterly, Form 940 yearly, state withholding and unemployment returns, and W-2s to each worker.

   For independent contractors, collect a W-9 before you pay them and send a 1099-NEC when payments for the year meet the IRS threshold. Classify workers correctly. Calling an employee a contractor can bring back taxes and penalties, and the IRS and states use different tests. Ask your accountant or attorney when a worker's status is unclear.

   • Get a W-9 before paying any contractor
   • File 941, 940 and state returns on time
   • Send W-2s and 1099-NECs each year
   • Check worker status with your accountant
8. 8

   Hire the right accountant

   Hire a CPA or enrolled agent who works with small businesses in your field and your state. Ask other owners, your banker or your attorney for names. A good accountant helps you plan all year and also files your returns.

   Ask what they charge, what they need from you, whether they do bookkeeping or payroll, and whether they can represent you if the IRS sends a notice. Give them read access to your accounting software so they see real numbers. Meet before the year ends to plan, not only after it closes.

   • Get names from owners in your trade
   • Confirm CPA or enrolled agent status
   • Ask about fees, scope and IRS notices
   • Book a planning meeting before year end

General information only, not legal, tax or financial advice. See the Disclaimer.