Date: March 10, 2022
Top Tax Tips for Sole Proprietors
A sole proprietorship is one of the most common types of business structures, and it is one of the easiest to establish. To the IRS, there is no difference between you and the business, tax-wise. It also means you are the only responsible party for tax obligations and any debts under the business. As a sole proprietor, do you know what taxes you are responsible for?
As a pass-through entity, this means that the income earned is the income the owner keeps, so essentially it is income passed through from the business to the owner. When taxes are filed, sole proprietors are responsible for:
- Estimated Taxes (for federal and state)
- Sales tax (depending on your business type)
While the list is long, keep in mind one advantage you have is the deductions you can take. For instance, there is the deduction of health care for yourself and spouse, and any dependents. On the flip side, it is limited to the amount of your taxable income, so if you took a loss on the business, you can’t take the health insurance deduction.
There are other deductions you can take, keep in mind that the IRS is looking for these deductions to be considered ‘Ordinary and Necessary’. Here are some of the most common and beneficial deductions to consider:
- The home office deduction (if you qualify)
- Rent and utilities
- Contributions to retirement plans (SEP-IRA, for example),
- Taxes and licenses
- Any business-related education expenses
- Legal and professional fees (such as an accountant)
- The ’Pass Through’ Deduction (subject to limits)
Keep that in mind the IRS does tend to keep a closer eye on sole proprietor tax returns as the lines tend to get blurred between personal and business expenses. The best way to avoid any red flags from the IRS and protect yourself and the business is to have a professional in your corner.
As always, it is very important to keep excellent records, especially when there are deductions involved. Having your monthly accounting handled by an accountant will help ensure that you are in compliance. Since there is much that can be missed, don’t scrimp when it comes to filing your tax returns – as a sole proprietor, you want to make sure you don’t miss anything and open yourself up to an audit. We are happy to help make sure your 2021 returns are filed accurately. Click here to talk with one of our tax experts.