One of the best parts of being a sole owner is that you don ’ t have to file a separate occupation tax render. alternatively, you ’ ll report your business income and expenses on a Schedule C ( Profit or Loss from Business ), and the information gets carried over to Form 1040 — your personal tax imprint .
What new forms might you see?
If you ’ ve never filed a tax rejoinder as a sole owner before, you may be surprised to see a few new forms. hera are some of the common ones :
- Schedule C: The Schedule C is where you ’ ll report your business ’ income and expenses. Your net earnings or losses will carry over to your form 1040. alternatively, you might be able to fill out the dim-witted
schedule C-EZ if you ’ re reporting a acquire, don ’ t have employees, and you had less than $ 5,000 in expenses .
- Schedule SE: As an employee, you pay half of your Social Security and Medicare taxes, and your employer pays the early half. When you ’ rhenium freelance, you must pay both parts, a combine 15.3 percentage, on your clientele ’ net earnings. The agenda SE ( which stands for self-employment ) calculates how much this will be. You can deduct half of these self-employment taxes from your income on your form 1040 .
- 1099-Misc: You won ’ thymine receive a W-2 from the companies or clients you worked with throughout the year. rather, they might send you a 1099-Misc with the entire total they paid you for your services. You must include your 1099-Miscs when you ’ re preparing your tax reelect, and the earnings will contribute to your business ’ sulfur income .
- 1099-K: The 1099-K covers income from third-party payment network and menu transactions, such as accredit card, debit menu, and PayPal transactions. You may receive one of these if you accept debit or citation cards, sold items on-line, or were a rideshare driver. Like with the 1099-Misc, your 1099-K earnings induce added to your occupation ’ s income. however, the 1099-K reports your crude income, not the net income net income after discounts, fees, refunds, or other adjustments. Make sure you find and record these clientele expenses on your Schedule C, or you could wind up overpaying .
- 1040-ES: Because your clients don ’ metric ton withhold taxes from your payments, you may have to file estimated quarterly tax payments throughout the year. If you don ’ metric ton, and you expect to owe at least $ 1,000, you may wind up paying a penalty when you file your annual tax restitution. You can make estimate tax payments on-line using Form 1040-ES .
New tax forms aren ’ t by and large something people look fore to dealing with. Don ’ metric ton worry, though — tax preparers and tax training software can walk you through the process and fill out the forms for you. But before you get to that point, you ’ ll motivation to have your documents and records in holy order .
What will you need to file your tax return?
Compared to employees, sole proprietors may need to take a few extra steps before filing a tax retort .
“ It ’ s advisable for business owners to maintain good records of their revenues and expenses, ” says Rashad Phillips, an accountant and small occupation adviser in Charlotte, North Carolina. You ’ ll need these numbers to prepare your tax reappearance, and you should besides hold on to them and corresponding records ( such as receipts ) in case the IRS audit you, says Phillips .
You ’ ll necessitate to independently track your income from all your business natural process, as companies and customers aren ’ deoxythymidine monophosphate always required to send you a 1099-K or 1099-Misc. For exemplar, if a customer pays you less than $ 600 during the year, it doesn ’ t need to send you a 1099-Misc. however, you hush need to report that income on your Schedule C .
Phillips warns that flush if a party does create a 1099-Misc or 1099-K for you, it may not mail you a physical transcript. It could email you a copy or make your 1099 available on the caller ’ s app or web site. Be sure to look for these forms before you file your tax return .
You ’ re besides responsible for tracking the business expenses that you want to deduct from your business ’ income. lone expenses that are “ ordinary and necessity ” stipulate, meaning they need to be common, helpful, and appropriate for your argumentation of work. IRS Publication 535 goes over the electric potential business expenses, deductions, and rules .
occupation expenses could include :
- Materials or supplies
- Subscriptions to business software
- Payments to subcontractors
- rent for an agency space
- pastime on a business lend or line of credit
- indemnity premiums
- The function of a vehicle for work
It ’ s up to you how you want to track and store your records. Some people use accounting software, such as Xero, FreshBooks, or Quickbooks to track their finances, while others can do everything with a spreadsheet .
Don’t miss (or claim the wrong) deductions
As a sole owner, you may be eligible for a diverseness of deductions that can help lower your tax bill. however, you need to know when and how to qualify. differently, you may miss a discount and pay more than you need to, or you may claim the wrong tax write-off and gamble an audit .
For exemplar, unlike an employee, you may be able to deduct your health indemnity premiums if you aren ’ t eligible for an employer-sponsored plan through a occupation or from a spouse ’ sulfur company. The freelance health policy tax write-off is specially valuable because it ’ s an above-the-line tax write-off, which means it can lower your adjusted gross income and help you qualify for other credits or deductions.
On the early hand, there are deductions that you may want to take but shouldn ’ deoxythymidine monophosphate. For example, you can ’ metric ton withhold the cost of discipline as a business expense if it qualifies you for a raw line of solve or it ’ s a minimum necessity for a job. The dwelling office deduction is besides normally misunderstood, and you may want to read the rules cautiously to verify you qualify .
Filing your return
once your records are in order, preparing a tax return as a sole owner international relations and security network ’ t a lot harder than a non-business return. All your business activeness will wind up on your Schedule C, and your net income business profits will carry over to your shape 1040 — the lapp one you would file even if you didn ’ t have a sole proprietorship .
You can hire a tax preparer to complete and submit your return, or you can try the DIY approach with downloadable or on-line tax software. There are even some loose software options for sole proprietors .
If you want to learn more about filing taxes as a sole proprietorship, the IRS has a nine-part video series on little occupation taxes. You may besides want to hire a tax lawyer or preparer who is familiar with your business and can help you optimize your tax scheme for the coming years .
This article was primitively written on November 14, 2018 and updated on February 1, 2021 .
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