Adell Kellel ran a successful restaurant in New York.
However, instead of honestly reporting his earnings, Adell cooked the books. He used the money to buy luxury items, like a Porsche and Mercedes. After catching on, the IRS took the restaurateur to court. Now, at age 63, Adell is sentenced to 2 years in federal prison.
Accurately reporting income is a big responsibility. Even when you mean to do things by the book, it’s easy to make a mistake. To help you avoid getting into trouble with the IRS, we created this short guide.
How do sole proprietorship taxes work? Read on to find out.
What Are Sole Proprietorship Taxes?
First, the sole proprietorship is one of the most common types of business structures. Sole proprietorship taxes make it easier to organize finances as a small business.
For tax purposes, there isn’t any separation between your business and yourself during a sole proprietorship. This gives the IRS the ability to treat you as both parties directly. Since your business structure isn’t incorporated, you’ll enjoy all of the income from your company’s activity.
On the other side of things, you’re also entirely responsible for any tax and debt obligations that your company racks up. You’ll find that setting up a sole proprietorship is fairly easy. In a lot of states, you can form a sole proprietorship without having to apply for any type of special licensing.
Things are going to be even more straightforward if you’re the only employee in the company. It’s easier to qualify for a sole proprietorship when you don’t have to manage payroll for others.
How Are Sole Proprietorships Taxed?
Now you know that a sole proprietorship is a way of representing yourself and the company simultaneously. But how do the taxes work exactly?
For federal taxes, you’ll need to fill out a form 1040. Form 1040 is a type of individual tax return.
Next, you’ll need to fill out a schedule c. Schedule c is the portion of the tax form where you report any profit or loss.
Form 1040 is going to take care of getting your personal income information to the IRS. Schedule C form is going to take care of reporting your business income to the IRS.
Do you know what tax bracket your company falls under? Your specific tax bracket and the exact amount of money you owe will be based on form 1040 and schedule C.
If your state is going to be assessing the income tax, you’ll need to carry the numbers over from your federal forms to your state farms. Depending on where you live, you’ll have a different amount of tax liability based on your tax bracket. If you’re having trouble figuring out your tax bracket, sites like https://www.taxfyle.com/tax-preparation-outsourcing, can help.
Special Tax Deductions
When it comes to small business taxes, you have to know the deductions you qualify for. Each deduction might not seem a lot on its own. However, when added together, they can make a huge difference in your tax liability.
You can deduct health insurance premiums for your family and yourself without having to itemize it on your tax return. As a sole proprietor, all of your health insurance payments are considered an above-the-line deduction.
As an above-the-line deduction, you can take out health insurance premiums before calculating your gross income. However, keep in mind that you can’t deduct health insurance premiums if a group plan covers you.
Next, you can also start deducting business mileage. If you’re using your car for business purposes, you could wind up saving hundreds on your tax liability.
To qualify for a mileage deduction, you’ll need thorough records. We suggest downloading a business app that makes it easy to keep track of each mile you drive.
What About an LLC?
Do you own a limited liability corporation or LLC? You still may qualify as filing your taxes under the definition of a sole proprietor.
An LLC is a legal status granted at the state level. That means when it comes to federal tax status, the government may still view you as qualifying for sole proprietorship taxation.
The exception to this rule would be if your LLC already has two members. Since you’re not the only operating party in that situation, you would qualify as a partnership for tax purposes.
The good news is that each LLC partner can choose to file their taxes as a corporation. To file your taxes as a corporation, you’ll need to fill out IRS form 8832.
When Should You File Business Taxes?
You’re going to be filing your business taxes throughout the year. Form 1040 and schedule C are annual tax forms. Whereas, forms for payroll taxes are due quarterly.
You’ll need to complete the required forms using the same schedule C as your tax returns. When the end of the year tax date, April 15th, rolls around, your papers should already be in. If you need an extension, you can usually get one that extends out until October 15th for filing.
Avoid IRS Penalties
Forgetting to pay on time is going to cost you more money in the long run. The IRS can charge you a penalty for late payments, and you could also receive a penalty for any IRS business form that you don’t fill out completely.
If you’re worried that you’re not going to be able to keep up with the different tax deadlines, save each date on your phone. Find out what your state-specific dates are for filing quarterly, and mark them on your calendar. Next, mark April 15th on your calendar, and set a reminder for one month ahead.
Feel Confident About Your Finances
Now you know the ins and outs of filing sole proprietorship taxes. It’s clear to see that each company’s unique situation will play a role in how you fill out the forms.
However, no matter what industry you’re in, you should be paying close attention to deductions you qualify for. Take a moment today to start writing down potential deductions that you think your business could be eligible for.
To make things easier, we suggest downloading an app that helps you keep track of your deductions on your smartphone. For more insightful tips, enjoy another one of our articles.