The most common form of ownership of a small business, a sole proprietorship (sole proprietorship if you are formal) is an “unincorporated business” where the owner literally owns it. whole of the company. Thus, for tax reasons, the business and its owner are considered the same tax entity.
Self-employment literally means working for oneself, which is often the case with sole proprietors. In other words, you are your own (and only) employee and you pay yourself.
To summarize the above: self-employed workers mean anyone who chooses to work for themselves and a sole proprietorship is a model of how the business is created. Now that you have the jargon, it’s time to conquer tax returns.
What the self-employed must do at the time of taxation
As a sole proprietor on your own account, you must report the income and expenses of your business in your personal 1040 return by completing Schedule C, Income and Expenses of Business.
Your Form 1040 documents your personal income, while your Schedule C shows your company’s income and expenses. Note: If you have multiple sole proprietorships, you must produce a Schedule C for each company you operate.
How do you know if you are a sole proprietor? If you have not filed any documents, the default for an unincorporated business is a sole proprietorship.
Using Accounting Software
I hope that when you started your business, you also invested in reliable small business accounting software, such as FreshBooks, LessAccounting, QuickBooks, Wave, and Xero. It would also mean that you follow best practices by keeping your books throughout the year and that you have records of what you need to declare your taxes. If you used tools to scan receipts and track mileage, even better.
Another benefit is that most tax preparation software will allow you to import your income and expenses directly from your accounting software.
If you have not invested in an accounting software, do not worry. Although this is certainly recommended, the Internal Revenue Service (IRS) does not require it. But, it definitely makes the process of filing your return easier. And if you have not used any software, you will have to manually collect all your receipts for the year to deduct your business expenses.
Objective: If you have a shoebox receipts this year, take the time to use the right tools to ban the shoebox next year.
Have a separate bank account
Similarly, you should have opened a separate bank account to track your business income separately from your personal income. Not only is this a good practice, if you are audited, the IRS disapproves of the use of a personal account for business income. (And no one likes an angry listener.)
Finding a Good Accountant for Small Business
If you are really nervous about filing a tax return, ask for help from a certified public accountant (CPA) or a registered registrar. Some questions to ask when choosing a qualified CPA or EA include asking about how long the individual has been licensed, as well as the type of protection that they will allow you in the future. case of an IRS audit. As with all good business decisions, make sure you get the service contract in writing.
To help you make this decision, check out these articles on choosing an accountant from QuickBooks, Wave, and Xero.
Bonus tip: The costs of tax preparation software, accounting software or applications are all tax-deductible business expenses. This also includes professional accountancy fees.
Understanding Taxes on Self-Employment
When you are a W2 employee working for a company owned by someone else, you and your employer share the burden of paying the payroll taxes (employer taxes). At the federal level, this includes the payment of your social security and health insurance taxes (also known as FICA taxes) – 50% paid by your employer and 50% paid by you in the form of withholding .
This changes when you start your own business. When you own a business, you are 100% responsible for paying your share of your Social Security and Medicare taxes as self-employment taxes, which means you pay your share and the share of the employer.
The social security rate is 12.4%. However, this only applies to your first $ 128,400 in earnings. You will not be subject to Social Security taxes on any amount of profit you earn that is greater than $ 127,200 for 2017 and $ 128,400 for 2018.
Medicare taxes work slightly differently. The tax rate for Medicare is 1.45% and has no income cap. However, if you earn more than $ 200,000 as a single filer, $ 250,000 for a joint marriage, or $ 125,000 for a separate marriage, you will be subject to an additional 0.9% Medicare tax. earnings that exceed these thresholds.
A little piece of good news. You can deduct up to 50% of your taxes on self-employment (the employer’s share) from your personal income taxes when you calculate your adjusted gross income on your 1040.
Attention also to local and state taxes.
In addition to federal income and employment taxes, you are also subject to the tax laws of the state and city where you operate. These taxes include state income tax, sales taxes, transportation taxes and education.
If you are in a highly regulated industry, you may also be subject to excise or loss taxes. Alcohol, tobacco and gasoline are often subject to excise taxes, as are services, such as the transportation of people or products by air or by local telephone service or any equipment. telephone rental.
Own a spa that offers a tan? There is even an excise tax on artificial tanning services.
Note: Sales taxes and excise taxes are not tied to your personal income, such as income taxes and self-employment. Instead, they are related to the cost of doing business. Any deduction you would claim for these taxes would be entered in your Schedule C as a deduction from corporation tax.
Pay as you go by paying quarterly
Even though your filing deadline is not the month of April, the federal deadline for paying business taxes falls on the 15th day of the third month of the fiscal year , which places these dates on March 15, June 15 and September 15 and December 15 for any business whose fiscal year extends from January 1 to December 31. If any of these dates occur on a weekend or holiday, payment must be made the next business day.
In addition to your company’s income tax, your taxes on self-employment are generally paid quarterly on Form 1040-ES, which is similar to a regular 1040 form and provides payment vouchers ( if necessary).
If it is your first year of business, you will be asked to estimate both your business income and your personal income from your business. business for your taxes on business and employment. After that, your taxes are assessed by looking back the year before.
Many states and local tax administrations also follow quarterly schedules. However, it is better to check with each authority.
Find the best way to pay yourself
When you pay an employee, you pay him a salary or salary. When you pay yourself as an owner of a sole proprietorship, the salary you pay yourself is called a draw (owner’s draw).
Indeed, giving yourself a “salary” in the form of a draw helps you to establish a regular income pattern. In turn, it helps you to have a clearer idea of the cost of your work. Finally, if you are using payroll software for small businesses, this will help you automate the payment process.
The payroll software will also help you process your self-employment taxes by withholding and depositing the appropriate amounts and submitting your quarterly payments to the relevant tax authorities. (As a business expense, your payroll subscription fees are also deductible from your business income.)
Determining exactly how much you pay is a challenge for every business owner. Much depends on the stage of your business, your individual needs, long-term projections and more. The best bet is to bring your accountant or accountant into this discussion. There are many moving parts and you want to know how everyone meets.
Knowing the high cost of small business tax mistakes and how to avoid them
A large tax bill can have a significant impact on your bottom line. As such, it is best to prepare a sound business plan and a financial strategy.
The IRS closely monitors small businesses and imposes sanctions on the following types of sanctions.
- Failed to file – For not filing a tax return in a timely manner.
- Failure to Pay – For failing to meet your tax payment obligations on time.
- Filing Failure – For failing to make the required tax deposits for the employer’s parts of your taxes on self-employment.
One important thing to note is how the IRS inflicts penalties and interests. For most fines, such as failure to produce or default, the amount increases by a percentage each month. The penalties for non-payment increase by half a percent per month – but they can reach 1% per month if you receive a withdrawal notice and you do not pay within 10 days. The failure to file penalties increases at the rate of 5% per month and the maximum penalty for both is 25%.
The interest, however, can manifest itself as often as every day. Therefore, it is always in your interest to pay as much as possible of your outstanding tax debts as soon as possible in order to avoid any further interest.
Interest on these penalties only exacerbates the fact that the problems are not resolved and, if there is willful negligence on your behalf, there may also be civil and criminal charges.
Learn How to Reduce Your Tax Obligations
Now that you understand your tax obligations as a sole proprietor, you could probably use some tips to minimize your tax liability. The best way to reduce your tax bill is to maximize tax deductions for the small businesses for which you qualify, such as:
- Mileage: For business trips, you will want to invest in a mileage log. While you may choose to take standard mileage deduction or actual costs, be aware that once you use the actual cost method, you must continue to use this method for the following years. In most cases, it is best to respect the standard mileage for the largest deduction over several years.
- Ministry of the Interior: To claim the home office deduction, the separate room or structure that you claim must be used for business purposes only. For your home office, you can deduct a percentage of your household expenses attributable to the use of your home office. You can claim this deduction in two ways: by the simplified method of multiplying the square footage of your office by $ 5 or by using Form 8829 to calculate detailed expenses of more than $ 1,500.
- Other Expenses: For all other deductions, such as self-employed medical expenses, office supplies, telephone and Internet charges, and other miscellaneous expenses you will have to keep careful records. While the IRS will allow the use of bank statements, you should be able to prove expenses that can easily be confused with personal costs – such as trips to Wal-Mart or purchases on Amazon – were indeed for professional use. Like having a separate bank account, a professional credit card is also a good idea.
When filing taxes for the 2018 fiscal year, sole proprietorships can benefit from a new 20% deduction on their business income. The deduction is staggered by income and personal filing status (joint filing, single, etc.) and industry classification. As this is a new deduction with new rules, many professional organizations seek clarification on the details. In other words, you will definitely want to read on this one and get some help from a tax professional before claiming this deduction.
Take a deep breath
You always knew how to be an entrepreneur was not for the faint of heart. Like anything else, if you plan and prepare, taxes on individual businesses should not be the monster at the end of your year.
The advice we share on our blog is intended to be informative. It does not replace the expertise of accredited professionals.
Author: : Marketing Specialist and Founder of the Career and Lifestyle Advice Blog Punched Clocks (www.punchedclocks.com), Sarah Landrum is a business and career expert passionate about writing. Between the posts, Sarah spends her time chasing her dogs through the yard and tinkering with her house.