The first year on your own brings a tax system you never saw from a paycheck. Nothing is withheld, the money you spent getting started has its own rule, and your first return makes choices that stick. Here are the federal rules that matter in year one, in the order they come up. State income, sales and payroll taxes come on top, and they vary by state.
Before the first job: start-up costs
Money spent before the business opens is not an ordinary expense. Under 26 U.S.C. §195, a start-up expenditure is an amount paid to investigate or create an active trade or business that would be deductible if the business were already running. IRS Publication 583 gives advertising, travel, surveys and training as examples. In a trade business that means things like the first website and yard signs, a survey of the local market, and trips to line up suppliers.
Section 195(b) sets the deduction:
You do not file a special election to get this. Treasury Regulation §1.195-1(b) treats you as having elected it for the year the business begins, unless you choose on a timely filed return to capitalize the costs instead; either choice is irrevocable. Publication 583 adds a separate deduction of up to $5,000, on the same terms, for organizational costs, and points to the Instructions for Form 4562 for the amortization.
Tools, equipment and the truck are not start-up costs. Publication 583 says the cost of an asset such as machinery or office equipment is usually recovered through depreciation; the faster routes are in Expensing Tools and Writing Off the Truck.
Say a painter spends $7,400 before her first paying job: $3,400 on a website, signs and the first ads, $2,600 on a paid survey of the neighborhoods she plans to work, and $1,400 on travel to line up suppliers. The business begins in March 2026. She deducts $5,000 for 2026. The other $2,400 is spread over 180 months at $13.33 a month, so 2026 gets ten months of it (March through December), $133.33, for a first-year total of $5,133.33. Each later full year gets $160. Keep the receipts and write down the month the business began, because that date drives the arithmetic.
The EIN: free, quick and sometimes required
An Employer Identification Number is the business’s federal tax number. The IRS issues it free online: the application is done in one session that times out after 15 minutes of inactivity, and if it is approved you get the number at once. The IRS warns that you never have to pay a fee for an EIN, whatever other websites charge. The online tool runs Monday to Friday from 6 a.m. to 1 a.m. the next day, Saturday from 6 a.m. to 9 p.m. and Sunday from 6 p.m. to midnight, Eastern time, and allows one EIN per responsible party per day.
The IRS says you generally need an EIN to hire employees, operate a partnership or corporation, pay sales and excise taxes, or change your business structure or ownership. If you are forming an LLC or a corporation, form it with your secretary of state first, then apply. Choosing the structure is covered in LLC, Sole Proprietor or Corporation.
A sole proprietor with no employees is not on that list, but many get an EIN anyway, because general contractors and property managers ask for a Form W-9 before they pay you. Form W-9 says a sole proprietor may enter either a Social Security number or an EIN, although the IRS encourages the Social Security number. An EIN is how you keep your Social Security number off those forms, and it is ready the day you hire your first employee.
The first year’s tax payments
Self-employment tax is the Social Security and Medicare tax a paycheck used to cover. The IRS puts the rate at 15.3% (12.4% for Social Security and 2.9% for Medicare), and it applies once your net earnings from self-employment are $400 or more. Income tax comes on top, and no one withholds either one.
So you pay as you go. The IRS says sole proprietors and partners generally must make estimated payments if they expect to owe $1,000 or more when they file. There is a first-year exception: you owe no estimated tax this year if you had no tax liability last year, were a U.S. citizen or resident for the whole year, and last year covered 12 months. Many people leaving a job do not meet it, because their pay last year carried income tax. For them, the IRS says most avoid the underpayment penalty by paying at least 90% of this year’s tax or 100% of the tax shown on last year’s return, whichever is smaller, with special rules for certain higher-income taxpayers. Last year’s return is your first planning number.
If you still draw a paycheck, from a part-time job for example, the IRS says asking that employer to withhold more on a new Form W-4 can stand in for estimated payments. The due dates and a set-aside method for every deposit are in Quarterly Estimated Taxes.
The choices your first return makes
Publication 583 says you adopt your tax year by filing your first return using it, and you choose your accounting method, such as cash or accrual, when you file that first return. Your books must use the same method, and changing it later generally takes IRS approval. Settle it with whoever prepares the return before you file, so the choice is made on purpose.
Records from the first day
Publication 583 says everyone in business must keep records, that the law does not require any particular system as long as it clearly shows your income and expenses, and that one of the first things to do is open a business checking account kept separate from your personal one; the setup is in Separate Business and Personal Money. Keep the documents behind every entry: invoices, deposit slips and the Forms 1099-NEC you receive for income; canceled checks, account statements and invoices for expenses. Vehicle, travel and gift expenses have recordkeeping rules of their own, which the IRS sets out in Publication 463.
Two Form 1099 rules start in year one:
How long to keep all of it is covered in How Long to Keep Business Records.
A first-year checklist
- Save every receipt from before the first job, and note the month the business began.
- Get an EIN if you will hire, form an LLC or corporation, or want your Social Security number off W-9s.
- Open the business account before the first deposit.
- Set aside a share of every deposit for tax, and make the estimated payments on time.
- Collect a W-9 from each subcontractor before paying them.
- Choose your accounting method with your preparer before the first return.
- Check your state’s registration, sales tax and license rules; start with Do I Need a Contractor License? and Sales Tax on Your Invoice.
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.