Managing Taxes for Sole Proprietors
According to John Hewitt, founder of Liberty Tax Service, set aside 30-40% of your income to cover federal and state taxes such as self-employment tax and income tax. The Tax Cuts and Jobs Act passed in December 2017 means you might qualify for a 20% deduction. Prepare by putting this money in a separate account.
As a sole proprietor, pay estimated taxes if you expect to owe over $1,000. Sole proprietors file taxes using Form 1040. You pay self-employment taxes and report income individually. If you have employees, file Forms 940 for FUTA tax and 941 for withholding taxes.
Understanding and managing taxes is key for any business’s success.
Paying Yourself as a Sole Proprietor
Decide an appropriate amount to pay yourself based on what you would pay someone else. Treat yourself as both the business owner and employee. Pay yourself accordingly as you would pay someone else.
To determine profits to pay yourself, keep accurate records of assets and liabilities. A projected profit and loss statement can guide what to draw and how often.
Tax Filing for Sole Proprietors
You can file taxes yourself using TurboTax, or consider an accountant for more complex business finances.
Pay income taxes on your sole proprietorship’s profits, not total income. Retain enough profits to cover your tax obligations.
Aim to set aside 30-40% of income for federal and state taxes. Save 25-30% of taxable income for quarterly estimated taxes and any extra owed using Form 1040-ES.
To pay taxes, file Form 1040 plus Schedule C for business profit/loss. Form 1040 reports personal income and Schedule C reports business income.
Sole proprietors pay estimated taxes quarterly and may save on taxes by converting to an LLC structure to utilize more deductions.
Carefully consider your financial needs, tax obligations, and business plans. Understanding the options available and seeking professional advice when needed will ensure you pay yourself in a financially and legally compliant way.