Running a sole proprietorship or sole trade ship can be a straightforward way to establish your business, but it involves many tax implications. This blog will guide you on the right method to help you with tax preparation for sole proprietorship.
Today, we are going to discuss the following:
- Best Way To File And Pay Taxes As A Sole Proprietor
- How To Avail Of Tax Benefits Being A Sole Proprietorship?
- What Are The Popular Sole Proprieter Tax Deductions?
- Are Sole Proprietors Entitled To Tax Refunds?
- What If I Fail To File My Taxes On Time?
Many business owners may be confused by tax preparation for sole proprietorship. Even those with a huge experience in tax preparation sometimes have trouble determining which forms to complete, what to deduct, how to calculate all the figures, etc. The following questions on how to do personal tax filing and pay taxes as a single proprietor may aid business owners in understanding their numerous taxation responsibilities and deciding whether to seek expert advice.
Best Way To File And Pay Taxes As A Sole Proprietor
Most sole owners must submit income tax returns and pay taxes on their business profits. According to IRS regulations, you must submit an income tax return if your business’s net earnings reach $400 or above. Even if your self-employment profits were less than $400, you might still have a tax filing responsibility, as stated further in the IRS Form 1040 instructions. Furthermore, like other forms of business organizations, sole proprietors are liable to self-employment taxes.
Instead of filing a separate tax return for your business, as a single proprietor, you record your business revenue on IRS Form 1040, using Schedule C to disclose your business profit or loss. Schedule C is needed by the IRS when the major aim of your business is to generate money or profit, and you are consistently participating in the activity. Prepare to record your accounting method, gross revenues, sales, income, cost of goods sold, and deductible business costs on Schedule C. If you are a single owner and have more than one business. You must submit a separate Schedule C for each business.
Depending on your business type, you may need to include extra tariff schedules with your return. Instead of attempting to identify which schedules are necessary, calculating your tax liabilities, completing forms and schedules, and submitting your own tax returns, having a personal tax preparer for you can provide important peace of mind.
How To Avail Of Tax Benefits Being A Sole Proprietorship?
There are a number of reasons why entrepreneurs prefer single proprietorships to other forms of company formations. Compared to corporate company structures, expedited filing is one of the most significant tax advantages.
To begin, although corporations, LLCs, and partnerships must have their own taxation ID numbers (also known as an Employer Identification Number, or EIN), personal tax proprietor can utilize the lone proprietor’s Social Security Number for tax purposes. The pass-through income is an income produced by sole owners, which means that if you are a sole proprietor, you do not need to file a separate taxation return for the company entity. You must know that government has a track record of your income and spending. So, while the federal corporate income tax rate for 2021 is 21%, the sole proprietorship tariff rate is effectively your own individual income tax rate, which may be lower. As part of the Taxation Cuts and Jobs Act of 2017, some sole proprietorships may be eligible for a 20% deduction on net company income.
What Are The Popular Sole Proprieter Tax Deductions?
Some of the most popular sole proprietorship tax deductions include the following:
- Interest on business loans.
- Business licenses.
- Vehicle that is in business use.
- Education costs(related to your sole proprietorship).
- Internet and phone expenses.
- Qualified business travel expenses.
- Subscription costs for specialized publications.
- Business insurance expenses.
- Rent for office, warehouse, or retail space for your business.
- Advertising and marketing costs.
- Associated business meals and entertainment.
- Self-employed retirement plan contributions.
- Home office deduction.
- Health insurance premiums.
- Sales taxes.
- Certain startup expenses.
Are Sole Proprietors Entitled To Tax Refunds?
You can get a tax refund if you pay more than you owe throughout the year, regardless of whether your business is a sole proprietorship, corporation, or anything associated. Your expected quarterly payments should base on your previous taxation year’s revenue. So, if you overpay your anticipated tax preparation during the year, you might get a refund when you file your taxes.
What If I Fail To File My Taxes On Time?
It is critical to file your tax returns on time and pay what you owe in full by the payment date. If you file your tax return after the deadline, you may face steep penalties, fines, and interest on unpaid taxes.
Because it is a busy time of year for their firm or there are challenges with the documents required to complete returns, sole proprietors and other small business owners may struggle to file their tax returns on time. The IRS does provide Form 4868 for requesting an automatic extension of time to file tax returns. This method allows you an extra six months to file your return and schedules, thus pushing the filing date to last. However, an extension of time to submit your taxes does not automatically entitle you to an extension of time to pay your taxes. If you request an extension, you should assess your tax liability and pay what you can by the original date.
For most sole owners, taxing their business revenue is an unpleasant but necessary component of running a business. There is minimal space for error in corporate taxes since mistakes can result in fines and interest.
If you still have questions about how to pay taxes as a single proprietor, contact a Tottax for low-cost legal counsel.
To know more about tax preparation for sole proprietorship, visit Tottax.com today.