Life changes
You Started a Business: Your First Tax Steps
The first year sets the habits the business keeps. Most of the tax trouble we see in later years traces back to a few setup steps that were skipped at the start.
Reviewed by LaToya Clark-Thompson, FounderLast updated
What changes on your taxes
If you start as a sole proprietor or a single-member LLC, the business is reported on Schedule C with your personal Form 1040. Profit is subject to income tax and also to self-employment tax, which covers Social Security and Medicare that an employer would otherwise split with you. A multi-member LLC files a partnership return on Form 1065, and a corporation files its own return.
Nobody withholds tax from business income. That is the biggest surprise for most new owners, and it is why quarterly estimated payments matter from the first profitable quarter. The self-employment tax calculator shows what to set aside.
The setup steps, in order
- Choose a structure. A sole proprietorship needs no filing, while an LLC is formed with the South Carolina Secretary of State. See LLC vs. sole proprietorship and starting an LLC in South Carolina
- Get an EIN from the IRS. It is free on irs.gov, and you need one to hire, open most business bank accounts and keep your Social Security number off forms you hand out
- Register for the licenses you need. Business licenses in South Carolina are issued by the city or county, and selling taxable goods needs a retail license from SCDOR. See SC business licenses
- Open a separate business bank account and card, and run every business dollar through them
- Set up bookkeeping from the first transaction, not at tax time
- Plan estimated payments with the quarterly tax calculator
Our business formation service handles the entity, EIN and registrations together.
Expenses and startup costs
Ordinary and necessary business expenses are deductible: supplies, software, advertising, insurance, a share of your phone, mileage, and a home office if you qualify. Costs you paid before the business opened, such as market research or training, are startup costs. A limited amount can be deducted in the first year and the rest is spread over later years. Equipment is usually depreciated or expensed under its own rules.
Every one of these needs a record: the receipt, what it was for and, for meals and travel, who and why. Keeping that from day one is far easier than reconstructing it. If it has already slipped, never kept books is where to start.
Mistakes we see in the first year
- Mixing personal and business spending in one account, which makes every deduction harder to prove
- Paying no estimated tax, then owing the whole year at once plus an underpayment penalty
- Paying helpers as contractors when they are really employees. See employee vs. contractor
- Forgetting that payment app and card processor income is reported to the IRS on Form 1099-K
- Forming an S corporation too early, before profit justifies the payroll and extra return
Getting set up with us
Bring your formation papers if you have them, your EIN letter, bank and card statements since you opened, and any 1099s. We set up the books, show you what to keep and how, and keep them current monthly through bookkeeping services. When the year closes, the return is prepared from books that already agree with the bank.
Frequently asked questions
Do I need an LLC to start a business in South Carolina?
No. You can operate as a sole proprietor under your own name, or register a trade name locally. An LLC adds a layer of liability protection and a more formal separation between you and the business, but for tax purposes a single-member LLC is treated the same as a sole proprietor unless you elect otherwise. Business structures explained compares the options.
When do I have to start paying quarterly estimated taxes?
Once you expect to owe tax for the year that withholding will not cover, estimated payments are due each quarter on Form 1040-ES. In the first year you may not owe a penalty if last year’s return showed no tax or you meet a safe harbor based on last year’s tax, but the tax itself is still due. Starting payments early keeps the bill at filing time manageable.
Can I deduct expenses from before my business made money?
Often, yes. Expenses after the business started operating are deductible even if it has not turned a profit yet. Costs from before it opened are treated as startup costs: a limited amount is deductible in the first year, and the rest is amortized over later years. The business needs to be run to make a profit, not as a hobby.
Do I need a separate bank account for my business?
For a sole proprietor it is not legally required, but it is the single most useful step you can take. A separate account makes the books accurate, makes deductions easy to support if the IRS asks, and for an LLC helps keep the liability protection meaningful. See commingled personal and business funds for what happens when they mix.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You hired your first employee
The forms, South Carolina accounts and deposit schedule a new employer needs before the first payroll.
Learn moreYour business is growing
How an S corp election saves tax, what it adds to your workload, and how to tell if your profit is there yet.
Learn moreYou started a side hustle
Side income next to a W-2: Schedule C, self-employment tax, expenses and estimated payments.
Learn moreYou bought a business vehicle
Standard mileage or actual expenses, depreciation choices and the records a business vehicle deduction needs.
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