Tax time is usually stressful, whether you are filing as an individual or as a business owner. For sole proprietors, who include business profits as income on personal tax returns, figuring out exactly what needs to be filed and when requires a bit of research. Although keeping track of business expenses and income separately from personal expenditures requires a high level of organization, preparing taxes for a sole proprietorship is less complicated than doing so for most other business structures.
Keep Meticulous Records
The first step, long before tax season rolls around, is to establish a system for keeping good records. Record every cent that comes in or goes out of your business, including where it was spent and what it paid for. Keep original receipts as well as a descriptive log. It is usually helpful to organize your income and expenses by month and by category, but the most important thing is to use a system that works for you and to develop a habit of recording each transaction as soon as possible after it occurs. Now, with your previous year’s records in hand, you are ready to start filling out the tax forms you need to submit for your sole proprietorship.
IRS Form 1040
Form 1040, the U.S. Individual Income Tax Return, is the form you probably used to file your taxes before you were self-employed. Because a sole proprietorship is taxed as an individual, not as a corporation, you will start with this form. Unless you have a very small business, you may also be required to make estimated tax payments on a quarterly basis using Form 1040-ES. Each schedule listed below should be attached to the 1040.
Itemized Deductions: Schedule A
As with personal income taxes, if you choose to itemize deductions, you will need to report them using Schedule A. The general rule of thumb is that you should calculate your itemized deductions and then figure out if their total is more or less than the standard deduction before deciding whether or not to claim your itemized list.
Profit or Loss From Business: Schedule C
Schedule C, Profit or Loss From Business, is the key to claiming your business-related income and expenditures on your personal tax return. This form asks for information such as your gross receipts and cost of goods sold as well as expenses from advertising, supplies, utilities, taxes, licenses and other categories. If you meet certain requirements, including having only one business, using the cash method of accounting, not having employees and not deducting expenses for business use of your home, you may be able to use the simplified Schedule C-EZ.
Self-Employment Tax: Schedule SE
As a sole proprietor, you are responsible for paying both the employee portion and the employer portion of your Medicare and Social Security taxes on your net earnings. Follow the instructions on Schedule SE to find out if you should use the Short Schedule or Long Schedule SE. There is also space on this form for deducting half of your self-employment tax.
Reporting and Paying Employee Taxes
If you had employees during the tax year, you will have to report their wages and pay the employer portion of their Medicare and Social Security taxes. The forms you need to accomplish this may include Form W-2, Wage and Tax Statement; Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return; and Form 941 or 943, Employer’s Quarterly Federal Tax Return or Employer’s Annual Federal Tax Return for Agricultural Employees.
Excise and Sales Tax
If you have collected sales tax that you need to remit, follow your state’s instructions for doing so. If you are required to pay an excise tax to the federal government, you will need to file Form 720, Quarterly Federal Excise Tax Return, along with any supporting forms or schedules that may apply.
Each tax year, the IRS publishes updated information for small businesses, including sole proprietors. Check the IRS website’s Small Business and Self-Employed section for a list of forms that may or may not apply to your situation before you begin preparing your tax return.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.