Dealing With Taxes As A Sole Proprietor
If you’re considering starting your own business and have no partners, a sole proprietorship is probably your best bet. You’ll be entitled to your own income. This is the easiest business structure and taxes are typically quite easy. You can simply report your company’s income and deductions on your personal tax return, so there are no special forms needed. This is called “pass-through” taxation, as the business profits pass through the business to your personal tax return. The business itself is not taxed separately.
However, there are still specific guidelines that you need to follow so that you pay the right amount of taxes on time. Find out what you need to do.
Pay Self-Employment Taxes
When your business income is more than your expenses, this is called your net profit. You are required to pay self-employment taxes on this net profit. The current rate is 15.3%. There are two parts to this: Social Security tax (12.4%) and Medicare tax (2.9%).
The first $147,000 of your net profits are subject to Social Security taxes, while you must pay Medicare taxes on all of your combined earnings. If your net profits exceed $200,000, you’ll have to pay an additional 0.09% in Medicare taxes.
Pay State and Federal Income Taxes
You will also be required to pay income taxes on your net profits. This includes both state and federal taxes, depending on where you live. Florida is one of several states that has no state income taxes, but you’ll still have to pay federal income taxes. This amount you’ll pay will depend on the federal income tax bracket you fall in and can range from 10% to 37%.
Pay Employment Taxes
If you have employees, you will also be required to pay employment taxes. There are several types of taxes you will need to withhold from your employees:
- State and federal income taxes
- Federal Insurance Contributions Act (FICA) taxes
- Federal Unemployment Tax Act (FUTA) taxes
Note that sole proprietors cannot claim themselves as employees of their businesses.
Understand Tax Deductions
Sole proprietors should understand what expenses can be deducted. Take advantage of the following deductions:
- Self-employment taxes
- Business mileage
- Business meals at restaurants
- Advertising costs
- Home office deduction
- Rent and leasing costs
- Cell phone
- Health care insurance
- Any other operating expenses
This is not a comprehensive list. Each company is different, so contact a tax professional to learn more about what items you can deduct.
Learn More About Sole Proprietorships
While sole proprietorships are generally easy businesses to set up, there are still taxes that need to be paid. There are guidelines that need to be followed.
Avoid penalties and other legal issues with help from Orlando sole proprietorship lawyer B.F. Godfrey from Godfrey Legal. We can help you understand the requirements so you make the right decisions. Schedule a consultation with our office today by calling (407) 890-0023 or filling out the online form.