Payroll and books in your first year
The money side of year one: a separate account, a method for your books, quarterly taxes, your first hire, contractors, the veteran hiring credit, and what changes if you want cost-type federal work.
Most first-year money problems are not about how much you made. They come from mixed accounts, a missed quarterly payment, a new hire with no I-9 on file, or a "contractor" who was really an employee. Each one is cheap to prevent in month one and expensive to unwind in year three.
This guide covers the setup in the order you will hit it. Every rule below was checked against the IRS, USCIS, E-Verify, the Department of Labor, or the FAR on the date at the top of the page.
Open a separate business bank account first
Do this before the first invoice goes out. The SBA puts it plainly: a business account offers limited personal liability protection by keeping your business funds apart from your personal funds. It also makes your books possible. If every business dollar runs through one account, your bank feed is your first-draft ledger.
You will usually need your formation documents and an EIN to open one. The EIN is free from the IRS, which warns that you never have to pay a fee for it. Ignore any site that charges for one.
Cash or accrual: pick a method on purpose
IRS Publication 538 defines the two main methods. Under the cash method, you report income when you receive it and deduct expenses when you pay them. Under the accrual method, you report income when you earn it and deduct expenses when you incur them, regardless of when money moves.
Cash is simpler and fits most new service firms. Accrual shows a truer picture when you have large receivables, inventory, or long contracts. Some corporations and partnerships must use accrual unless they pass a gross receipts test that the IRS indexes for inflation each year. Small firms usually pass it, but confirm with your preparer. Choose with your first return, because changing later can require IRS approval.
Quarterly estimated taxes
If you own a business that does not withhold tax from your pay, you likely owe estimated tax. The IRS rule of thumb: you generally must pay quarterly if you expect to owe at least $1,000 for the year after withholding and refundable credits. Individuals use Form 1040-ES.
| Payment | Covers income earned | 2026 tax year due date |
|---|---|---|
| 1st | Jan. 1 to March 31 | April 15, 2026 |
| 2nd | April 1 to May 31 | June 15, 2026 |
| 3rd | June 1 to Aug. 31 | Sept. 15, 2026 |
| 4th | Sept. 1 to Dec. 31 | Jan. 15, 2027 |
If a due date lands on a weekend or legal holiday, the next business day counts. You can skip the January 15, 2027 payment if you file your 2026 return by February 1, 2027 and pay the full balance with it. A simple habit: move a fixed share of every deposit into a separate tax savings account so the quarterly payment is never a surprise.
Your first employee: the paperwork in order
- Get an EIN The IRS says you generally need one to hire employees. It is free on irs.gov.
- Collect a signed Form W-4 on day one The IRS asks employers to have a W-4 on file for each employee. It sets federal income tax withholding. Collect the employee's name and Social Security number as they will appear on Form W-2.
- Complete Form I-9 within three business days USCIS requires an I-9 for every hire. The employer must complete Section 2 within 3 business days of the first day of work for pay. You keep the form on file; you do not send it to the government.
- Run E-Verify if your contract requires it A FAR rule requires federal contractors to use E-Verify for employees working under covered contracts. Participants create a case no later than the third business day after the employee starts work for pay.
- Report the hire to your state within 20 days Federal law requires new hire reports to the State Directory of New Hires within 20 days of hire. Some states require it sooner, so check your state's new hire site.
- Deposit payroll taxes electronically Federal tax deposits must be made by electronic funds transfer. You can do it free through your IRS business tax account, Direct Pay, or EFTPS. Your schedule is either monthly or semiweekly, set by the rules in IRS Publication 15.
- File Form 941 each quarter and Form 940 each year Form 941 reports withheld income tax plus Social Security and Medicare. Form 940 reports federal unemployment (FUTA) tax, with deposits due for any quarter where FUTA owed exceeds $500.
States add their own layer: state withholding, unemployment insurance registration, and often workers' compensation. Those rules vary by state, so register before the first payroll, not after.
Contractors vs. employees
The label in your agreement does not decide this. The IRS looks at the whole relationship under three headings: behavioral control (do you control what the worker does and how), financial control (who sets pay terms, covers expenses, supplies tools), and type of relationship (written contracts, benefits, permanence). If it is still unclear, either side can file Form SS-8 for an official ruling, which the IRS says can take six months or more.
For true contractors, collect a Form W-9 before the first payment. Report payments on Form 1099-NEC. For tax years beginning after 2025, the reporting threshold rose from $600 to $2,000, with inflation adjustments starting in 2027. The form is due to both the IRS and the contractor by January 31.
Signs a "contractor" may be an employee
- You set their hours and tell them how to do the work.
- They use your equipment, email, and title.
- They work only for you, open-ended, with no project scope.
- You reimburse their expenses like staff.
Signs of a real contractor relationship
- A defined deliverable or project, with a written agreement.
- They choose their own methods, tools, and schedule.
- They invoice you and serve other clients.
- They carry their own business expenses and insurance.
The Work Opportunity Tax Credit for hiring veterans: lapsed right now
The WOTC rewarded employers for hiring qualified veterans and other target groups. Its current status matters more than its amounts. A Congressional Research Service report updated May 13, 2026 says authority lapsed on January 1, 2026 for wages paid after December 31, 2025. As of October 6, 2026, the IRS and Department of Labor WOTC pages still describe the credit as authorized only through December 31, 2025, and we found no reauthorization posted on either site. Congress did fund state agencies to keep administering the program in the Consolidated Appropriations Act, 2026, but that funding does not revive the credit.
The WOTC has lapsed and been retroactively renewed before. That is why the screening step still matters. Form 8850 must be completed on or before the day you make a job offer and submitted to your state workforce agency within 28 days of the start date. Per CRS, states can review requests during a lapse but cannot issue certifications. If Congress restores the credit retroactively, employers who filed on time are positioned to claim it.
Under the last authorization, the credit was 40% of qualified first-year wages for a hire who worked at least 400 hours, or 25% for 120 to 399 hours. It is nonrefundable, so you need tax liability to use it. Veteran wage caps under that law:
| Qualified veteran group (last authorization) | Max qualified wages | Max credit at 40% |
|---|---|---|
| SNAP household for 3 of past 12 months | $6,000 | $2,400 |
| Unemployed 4 weeks to under 6 months in prior year | $6,000 | $2,400 |
| Service-connected disability, hired within 1 year of discharge | $12,000 | $4,800 |
| Unemployed 6+ months in prior year | $14,000 | $5,600 |
| Service-connected disability and unemployed 6+ months in prior year | $24,000 | $9,600 |
If you want cost-type federal contracts: DCAA-ready books
Fixed-price work needs ordinary clean books. Cost-reimbursement work needs more. FAR 16.301-3 allows a cost-reimbursement contract only when the contractor's accounting system is adequate for determining costs applicable to the contract. For defense work, the Defense Contract Audit Agency (DCAA) often reviews that system before award, using Standard Form 1408.
SF 1408 asks whether your system provides for, among other things:
- Segregation of direct costs from indirect costs Contract labor and materials must sit apart from overhead and G&A.
- Direct costs identified and accumulated by contract Usually a job cost ledger with a code for each contract.
- A logical, consistent method for allocating indirect costs Your indirect rates must follow a written method you apply the same way every time.
- A timekeeping system that ties labor to cost objectives Employees record hours by contract or indirect activity.
- At least monthly posting of costs to each contract Books closed monthly, not caught up at year end.
- Exclusion of unallowable costs under FAR Part 31 Costs like entertainment are kept out of what you bill the government.
You can build this in standard small business software with careful setup and written policies, or use software built for government contractors. Either way, set it up before you bid on cost-type work. Retrofitting a year of commingled books is slow.
Tools: a free route and two common paid options
You do not need paid software to start. A free route works for a one-person firm: a dedicated bank account, a spreadsheet that categorizes every transaction monthly, quarterly payments through IRS Direct Pay or your business tax account, and IRS Publication 15 for payroll withholding once you hire. The cost is your time and your risk of errors.
| Option | What it covers | Starting price (checked Oct. 6, 2026) |
|---|---|---|
| DIY (spreadsheet + IRS free payment tools) | Books and tax payments; you calculate payroll yourself | $0 |
| QuickBooks Online Free | Track income and expenses, 2 invoices per month, profit and loss report | $0/mo |
| QuickBooks Online Simple Start | Fuller bookkeeping with expense categorization | $38/mo regular (intro discount offered) |
| Gusto Simple | Payroll in one state, including tax filings and payments | $49/mo + $6/mo per person |
QuickBooks is accounting software; Gusto is payroll. Many small firms pair a bookkeeping tool with a payroll service. Prices and plan features change, so confirm on each vendor's own pricing page before you sign up.
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Get your business listed See listing plansQuestions homeowners actually ask
When are 2026 quarterly estimated tax payments due?
Per the 2026 Form 1040-ES: April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. If a date falls on a weekend or legal holiday, the next business day counts.
Is the Work Opportunity Tax Credit available for veterans hired in 2026?
Not as of October 6, 2026. Authority lapsed for wages paid after December 31, 2025, and the IRS and Department of Labor sites show no extension. Congress has renewed it retroactively after past lapses, so keep filing Form 8850 within 28 days of each eligible hire's start date.
Do I need to send a 1099-NEC to every contractor?
For tax years beginning after 2025, you file Form 1099-NEC when nonemployee compensation to a payee reaches $2,000 for the year, up from $600. It is due to the IRS and the contractor by January 31. Collect a Form W-9 before you pay.
Do I have to use E-Verify?
Federal contractors must use it for employees working under contracts that include the FAR E-Verify requirement. Some states also have their own rules. Every employer must complete Form I-9, whether or not it uses E-Verify.
Should a new business use cash or accrual accounting?
Many small service businesses start on the cash method because it is simpler. Accrual fits firms with inventory, big receivables, or long contracts, and some corporations and partnerships must use it if they fail the IRS gross receipts test. Decide with your preparer before your first return.
What does DCAA-compliant accounting mean?
It is shorthand for an accounting system that meets the government's adequacy criteria for cost-type contracts, as listed on Standard Form 1408: separating direct from indirect costs, tracking costs by contract, timekeeping by cost objective, monthly posting, and excluding unallowable costs. You only need it for cost-reimbursement work.
Is this tax advice?
No. It is general information checked against official sources on October 6, 2026. Talk to a CPA or enrolled agent about your situation.