A sole proprietorship is when a single person runs a business that isn't incorporated. Even though you're a one-person show, you have to understand sole proprietorship taxes. If you don't understand your taxes, you might end up paying too much or even worse - end up paying too much.
Continue reading this article to learn five things you have to know about taxes as a sole proprietorship.
Sole Proprietorship Taxes Need-to-Knows
If you don't understand your taxes, April 15th might be a surprise. A surprise April 15th usually is not a good one. Use these tips to avoid a bad surprise.
1. File the Proper Paperwork
If you're trying to do your own taxes, you need to make sure you file the right paperwork. Since you're a sole proprietorship, you won't need to get your W2 online like employees. You'll need to get your 1099s.
If you earn more than $600 from a company, they are required to send you a 1099 form. The government also receives a copy of the 1099 so don't try any funny business.
2. Pay Quarterly Taxes
When you're a sole proprietorship, you don't pay taxes once a year.
When you're a sole proprietorship, you pay taxes quarterly. These taxes are called estimated taxes, and you pay as close to what you think your taxes are going to be.
If you don't pay estimated taxes, you may have to pay extra money in penalties when you go to file your taxes.
3. Don't Over Deduct Your Gifts
You may have heard that gifts are deductible and that is true. What you should know is that all of your gift isn't deductible if it is over $25. Even if you spend $75 on the gift, you can only deduct $25.
When you deduct gifts, make sure you list all of the gifts you give so you can show it to the IRS if they audit you.
4. Properly Calculate Home Office Deduction
You may have heard that claiming a home office deduction is going to give cause you to put a target on your back for an audit. While home office deduction may be one of the things they look at to see if they want to audit you, you should avoid it just because of that.
If your space is dedicated to your work, then you should claim the deduction as the IRS allows.
5. Deduct All Business Expenses
When you start your new business, there are plenty of deductions. Some of those include new equipment purchases, travel, health insurance plans and more. If you fail to deduct all of your business expenses, you may pay much more in taxes than you should be paying.
Learn More About Small Business Taxes
Now that you know more about sole proprietorship taxes, you likely want to know more about how to pay the least amount of taxes possible. You can learn more about deductions and paying fewer taxes legally by reading our article on small business tax deductions.
