Sole Proprietor Taxes

Sole proprietors form a vast percentage of small businesses in the United States. If you’re one, sole proprietor taxes are one of the bigger issues you have to address.

Sole Proprietor Taxes
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As a sole proprietor, the IRS views your business as a pass through entity. A pass through entity is simply one in which all business finances are recorded on your personal tax return. In essence, the taxes related to the business pass through to your personal runs, hence the name.

Typically, you are going to report all business income, deductions, credits and so forth on Schedule C of form 1040. The form is title “Profits or Losses from Business” and is filed with your 1040 tax return at the same time you file personal taxes.

With your sole proprietor taxes, you will be taxed on the profit of the business. Put another way, the profit will be your gross revenues minus any allowable deductions such as rent, mileage, office supplies, professional fees and so on. Allowable deductions vary from business to business, but generally are those incurred in the pursuit of a profit. You can also write off most start up costs associated with getting the business up and running.

One downside to being a sole proprietor is estimated taxes. The IRS requires you to pay taxes throughout the year on earnings, to wit, it isn’t willing to wait until the end of the year to get its money. As a result, you need to estimate the total taxes you will owe for a year and then make quarterly payments totaling this amount. In subsequent years, you will need to adjust this amount as the business becomes more or less profitable.

A major downside to sole proprietor taxes is the self-employment tax. Since you do not receive a paycheck from a sole proprietorship, you inevitably fail to pay social security and Medicare taxes to mention a few. The government recoups this money by forcing you to pay a self-employment tax equal to 15.3 percent of the first $90,000 of income. This tax can be a surprise to many sole proprietors and leave them in a bad cash flow position. Make sure you understand this tax is coming and prepare for it accordingly.

Sole proprietor taxes are not particularly complex, but many sole proprietors get blind sided the first time they file. You should be fine as long as you do a little preparation during the year and make estimated tax payments.