A GUIDE TO SOLE PROPRIETORSHIP TAXES
You may simplify your finances by working as a sole proprietor or independent contractor. However, it's important to comprehend how your business structure influences your taxes. Sole owners must be aware of certain tax regulations. This article explains how to plan, file, and pay your taxes when you manage a business alone.
WHAT IS A SOLE PROPRIETORSHIP?
The most common and easiest way to establish your own business structure is a sole proprietorship. For tax purposes, a sole proprietor makes no distinction between yourself and your business. As a result, the Internal Revenue Service sees you as an extension of your business. This sort of business structure is unincorporated, which means you may keep all of the profits from your operations. Similarly, any debts and tax responsibilities incurred by the company are exclusively your responsibility.
A sole proprietorship has several advantages, including ease of setup and complete control over business decisions. You may form a sole proprietorship without a special license depending on the state where you live and do business. It also runs more smoothly if you're the only employee and don't have to deal with anyone else's payroll.
SOLE PROPRIETORSHIP TAXES
A sole proprietorship is a pass-through entity for tax purposes. The revenue from the business "passes through" to the owner, who then declares it on their income tax return. This can cut down on the amount of paperwork needed to file your taxes each year. However, it's crucial to know which sole proprietorship taxes you'll be responsible for. Sole proprietors are responsible for paying:
FEDERAL AND STATE INCOME TAX
To pay federal income tax for the year, sole proprietors must complete two forms. The first is Form 1040, which is a personal tax return. Then there's Schedule C, which details the profit and loss of a firm. Personal income is reported on Form 1040, whereas company income is reported on Schedule C.
Your tax bracket and the amount of income tax you owe are determined by your combined income from Form 1040 and Schedule C. If your state collects income tax, you'll need to transfer your federal income numbers to your state forms to figure out how much tax you owe. Your income tax liability would be determined by the tax bracket you fall into, which is determined by your combined company and personal income.
Employers are responsible for deducting Social Security and Medicare taxes from your salary when you work for them. However, if you're a self-employed lone proprietor, you're responsible for paying the sole proprietor tax.
For 2019, here's how the self-employment tax breaks down:
On the first $132,900 of your salary, 12.4 percent goes to Social Security tax. The Medicare tax accounts for 2.9 percent of the total.
The self-employment tax rate is 15.3 percent in total. You'll have to pay the Additional Medicare Tax of 0.9 percent of your total income is more than $200,000 as a single filer or $250,000 if you're married and file jointly. When you submit your federal tax return, you must record these amounts on Schedule SE each year.
FEDERAL AND STATE ESTIMATED TAXES
Estimated taxes aren't a separate type of tax. When you pay estimated tax, you're paying money in advance to cover what you expect to owe in income and self-employment tax at the end of the year. Normally, your company would deduct money from your paychecks to cover your tax bill. If you're an alone proprietor, you'll have to do it yourself.
Estimated federal and state taxes are due in January, April, June, and September of each year. The current tax year's first tax payment was due in April. As a result, the final is due in January of the next year. Filing deadlines are usually the 15th of the month unless the 15th of the month falls on a holiday or weekend. The filing deadline in this instance would be the next regular business day. Form 1040 ES can be used to file these taxes. However, you must also file your prior year's income taxes in April.
If your company sells goods or services, you may be required to collect and pay sales tax. How you pay and collect this tax is determined by your home state. The department of revenue in your state can tell you if and when you need to pay and submit taxes.
Although filing single proprietor taxes are unavoidable, understanding them may make the process go more smoothly. While you may be able to file your taxes on your own if your return is relatively simple, you may wish to see a professional accountant, if your income or spending is more complicated. The most essential thing to keep in mind is that you must always submit your taxes on time to avoid federal or state tax penalties.