Do you plan to start your own business as a sole proprietor? Life will change in many areas, and including your taxes. What changes can you expect when it comes to filing taxes as an independent entrepreneur? Here are a few key things to look for.
1. Schedule C
Probably the biggest change sole proprietors navigate in their income taxes is the addition of Schedule C. This is the form where you enter your business income and expenses. Tracking business income and related costs are the responsibility of each taxpayer.
Filing Schedule C is also associated with a higher risk of audit by the IRS, so you need to ensure that this form is completed correctly and honestly.
2. Business Deductions on Form 1040
You may now see some new, business-related deductions available elsewhere on Form 1040 (your individual income tax form). The most common is a deduction for half of the self-employment tax. The second most common is the ability to deduct health insurance — for you and often for your spouse — as an "above the line" deduction against personal income tax.
3. Sales and Other Taxes
Depending on your business, you may now be responsible for taxes other than income taxes. If you sell products, you may have to pay sales tax — possible even in other states than your own. Travelers in certain industries may be subject to fuel and road use taxes. Importers could have to pay excise taxes. And if you hire any employees, you will need to file and pay payroll taxes.
Most people subject to these taxes should seek outside help to prepare them. Eventually, you may be able to handle some tax forms on your own, but you should get help while new at them. Look for a professional who offers tax services.
4. Self-Employment Taxes
Self-employment taxes on Form 1040 are often a shock for new sole proprietors. These taxes take the place of FICA taxes (Social Security and Medicare) which would normally be calculated, withheld, and contributed to by an employer. Instead, you must calculate and pay these with your annual return. This can be a big expense if you haven't paid estimated taxes during the year.
5. Added Complexity
Finally, prepare to spend more time working on your taxes each year. Many business owners do well to have a mid-year checkup appointment in addition to the spring filing appointment. You may need to check whether your estimated taxes are correct, get advice about business financial moves, and discuss future changes.
Your spring appointments will also likely take longer as you put together the needed documentation. And you'll need to keep more (and possibly better) records for the business than for personal taxes.
Being prepared is one key to success as a sole proprietor. By understanding how your taxes change, you can prevent surprise tax bills, minimize tax obligations, and stay on the right side of the law. Learn more by meeting with a tax service in your area today.
For more information about how tax services can help you streamline your taxes, contact a local professional.
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