It’s that time of year again: tax time. Many things have changed in the past year, perhaps one of them being your employment status. If you’ve recently become a sole proprietor, you may be totally confused and overwhelmed by the prospect of filling out your taxes. However, dealing with taxes as a sole proprietor doesn’t have to be an anxiety-inducing process. Read on to learn everything you need to know about business accounting for sole proprietors and how you can get through this process without paying an arm and a leg.
What Is a Sole Proprietorship?
According to the U.S. Small Business Administration, a sole proprietorship is a type of business that is relatively easy to form and maintain. A sole proprietorship is an unincorporated business owned and operated by a single individual with no distinction between the business and the individual. Essentially, you are your business. As a result, you alone are entitled to all profits and are responsible for all debts, losses, and liabilities from the business.
This is the most common structure when it comes to starting a business because it doesn’t require any formal action to form. Instead, this status is automatically granted to you as long as you are the only owner. Although this business status is automatic, you still need to obtain all required licenses and permits to legally operate your business according to federal, state, and local regulations. Along the way, you may need legal assistance, so checking out our top formation service / registered agent service reviews should prove useful - Swyft Filings, BizFilings, SunDoc Filings, Inc Authority, or MyCorporation are some the best.
Benefits of Sole Proprietorships
Sole proprietorships are the most common business structure for new businesses for a reason -- they come with tons of benefits. For instance, sole proprietorships come with minimal costs and allow you to maximize your profit. Sole proprietorships also give you complete control over your business without involving other parties that may have conflicting opinions. Finally, sole proprietors enjoy lower tax rates when compared to other business structures and don’t require you to file separate business taxes. Instead, you only have to file individually and include any and all relevant information from your sole proprietorship.
Different Required Taxes for Sole Proprietorships
Sole proprietors are required to pay federal income tax, state income tax (if applicable), self-employment tax, and sales tax (if applicable).
Potential Tax Deductions for Sole Proprietorships
After hearing about all the different taxes you have to pay as a sole proprietor, it’s understandable that you’re feeling pretty overwhelmed. Thankfully, there are tax deductions you can potentially use to lower the amount of taxes you have to pay. While there are countless deduction options out there that can depend on your type of business, there are some common ones to look out for as a sole proprietor.
Here are some potential tax deductions available for sole proprietorships:
How to File Taxes as a Sole Proprietor
Filing taxes as a sole proprietor is a simple and easy process since it’s included with your individual tax return. You will need to file a Schedule C form which covers profits and losses from a business. From there, you can consider your potential deductions and try to decrease the amount that you owe. However, it’s important to remember that you will be on the hook for this amount with the federal and state governments.
This can be a surprise to new sole proprietors who are used to their employers withholding estimated tax amounts throughout the year. As a sole proprietorship, nothing is withheld, so if you’re not careful, you could receive a huge unexpected tax bill come April. In order to avoid this from happening, you should estimate your taxes ahead of time and put money aside throughout the year to eventually pay your taxes.
Do Sole Proprietors Need Accountants to File Taxes?
If all of this information has left you totally confused and overwhelmed, you may want to consider hiring an accountant to handle your taxes for you. While hiring an accountant isn’t completely necessary, they may be able to help you maximize your deductions. Additionally, you should also remember that the cost of an accountant can be used as a deduction! In any case, be sure to maintain careful records to make the process easy -- whether you do it on your own or use an accountant.
Dealing with taxes as a sole proprietor can seem like a real headache, but it doesn’t have to be with proper research and planning. If you find that you need help along the way, you can always consult with an accountant for professional assistance.