Tax Reporting for Sole Proprietorships
A sole proprietorship must pay various taxes. Each tax has reporting and payment requirements.
How and When to File Taxes
They submit a Schedule C with their 1040 annually. They also file Schedule SE and pay self-employment taxes quarterly.
Deductions for Sole Proprietors
Expenses like office space can be written off by sole proprietors.
Required Forms and Additional Taxes
The IRS lists potential taxes and forms. Note other taxes like payroll may apply.
Income and self-employment taxes are important. As a sole proprietor, report all income on a 1040. The business itself isn’t separately taxed. This "pass-through" taxation means profits go onto your 1040.
Registration and Licenses
Sole proprietorships don’t register with states. Instead, you may need business licenses, permits, tax ID documents, and fictitious name filings.
Tax Assistance Tools
If you’re a sole proprietor needing tax help, Bonsai Tax can scan bank/credit card receipts to discover potential deductions automatically.
Most cities/counties have regulations on professional licenses, permits and sales permits. If your profession needs a license to operate legally, apply through your city, county or state office. Check relevant government websites.
With a sole proprietorship, less paperwork allows faster setup. You can use your SSN instead of obtaining an EIN from the IRS, and you don’t need a separate business checking account.
To pay the IRS, estimate your taxable sole proprietorship income and file quarterly. Overestimate rather than underestimate to avoid penalties.
Income Threshold for Tax Payments
If your annual net earnings from self-employment were over $400, you must pay self-employment tax. You still have to file an income tax return if you meet other filing requirements.
Sole Proprietorship Structure and Liability
Sole proprietors have full control and ownership, but also full liability for debts and obligations. Setting up a sole proprietorship has low costs and paperwork.
Reporting and Filing 1099 Forms
You must issue a 1099-MISC form to sole proprietors, contractors and unincorporated businesses paid over $600 a year for services. You also file 1099 forms with the IRS.
Sole proprietors don’t receive a 1099 form and must keep careful records of all earnings and expenses. Use Form 1040 plus Schedule C and Schedule SE accordingly.
Only businesses must file a 1099 with the IRS and to each unincorporated business paid over $600 a year.
You cannot designate yourself as an employee or contractor by 1099 form. Use Form W-2 for wages and compensation for employees. If incorrectly issued a 1099, a corrected form should be requested.
If you backup withhold, you must issue a 1099 no matter the payment amount. If a contractor is subject to backup withholding, issue a 1099 even if under $600 a year.
Issue 1099s to LLCs, partnerships, sole proprietors, contractors and freelancers paid over $600.
You don’t need to issue a 1099 for personal payments or payments under $600 or to freelancers hired through third-party services.
When you contract a sole proprietor for over $600 in services, the IRS requires you to issue a 1099 to the worker.
Issue a 1099-NEC for cash payments to contractors over $600. Tax dividends are reported on Form 1099. Small business owners typically deal with Form 1099-NEC.