Starting your own business and working for yourself can be one of the most rewarding things you can do. You can achieve your dreams and support your family while doing what you care about most. When tax time comes around, however, it may be confusing for solopreneurs to get used to filing their taxes as a one-person business. In order to avoid unwanted costs, penalties or even an audit, it is important to be prepared to file your taxes in line with your business status.
Across the country, there are over 21 million solopreneurs, people running a small business venture on their own. Adjusting to filing taxes as a businessperson can be challenging on your own, so you may want to seek qualified advice from an accountant or tax professional in order to protect yourself. Accountants know the tax rules and may save you money in the long run by avoiding problems. Here are some things to keep in mind when you prepare to file your taxes as a solo business owner.
Prepare for Self-Employment Taxes
If you are used to working as a W-2 employee, you may expect that all of your taxes are taken out of your paycheck or from your employer. This includes not only your regular income tax withholdings but also your Social Security and Medicare taxes. When you work on your own and bring in $400 or more during the course of the year, you will have to pay self-employment taxes. These are separate from income taxes, so many solo business owners may not keep them in mind when first starting out.
If you are self-employed, you have to cover your contributions to Social Security and Medicare as well as your income taxes. In general, you will need to pay 15.3% of your income for these taxes, and you can deduct half of that amount when calculating your annual gross income for the year. If you owe over $1,000 in self-employment taxes, you will need to pay it quarterly for the years to come, rather than in one lump sum. Once you get accustomed to self-employment taxes, the quarterly payments can help you to calculate your savings in advance. However, it may come as a surprise in your first year.
Your Business Structure Matters
The most common type of solo business is a sole proprietorship. However, even if you are running your company alone, there are different types of legal structures that you can choose.
You could create an S-corporation, C-corporation or a limited liability company, which may provide greater protection for your personal assets from company lawsuits or debts. The corporate structure that you choose also affects your income tax filings.
If you run a sole proprietorship, you can file your taxes much like a freelancer. You just need to handle your self-employment taxes and file a Schedule C with your Form 1040, reporting your business income and expenses. The ease of handling your business as a sole proprietor is why many solo businesspeople go this route. However, if your business grows and you face conflicts or even litigation with other parties, you have little protection for your personal assets.
Corporate structures and limited liability companies provide greater protection, but they are more complex when tax time comes around. You will need to file paperwork with your state as well as a corporate income tax return and a payroll return, aside from your individual tax return.
Track Your Business Expenses
When you run your own business, you can deduct your business expenses in order to calculate your taxable income. In order to avoid audits or costly fees, it is important to stay on top of your business expenses and retain proof of the deductions that you claim. Keeping strong records can help your accountant prepare your taxes effectively and take advantage of all the credits and deductions for which you are eligible.
If you work from home, you may be able to deduct part of your housing expenses with a home office deduction. However, you need to deduct only the part of those costs for areas that are exclusively used for running your business, not those that are regularly used for other parts of your daily life. Excessive home-office deductions can trigger an IRS audit, so keeping clear records can help to protect you. You also can often deduct the expenses of running your personal car for business purposes throughout the year. For solopreneurs often on the road, the tax savings can be significant.
As a business owner, you may be able to deduct utility bills, phone bills and internet services that go to keep your business up and running. You can also calculate and claim depreciation for goods, equipment and property that belong to your business.
Plan for Your Retirement
One great way to save on your taxes while planning for the future is making contributions to your retirement account. If you have no employees, you can still set up an individual 401(k) plan. You could contribute up to $19,000 of income each year before taxes if you are under 50, and $25,000 if you are over 50. This can help to make sure that running your own business does not hold you back from planning for the future while also protecting a substantial amount of your income from taxes.
As a business owner, you are a professional. One of the best ways to prepare for tax time is simply to keep good business records, including all of your receipts, financial records, ledgers and profit-loss statements. If you work with an accountant, providing this information can help them to ensure that your taxes are as complete and precise as possible, helping you to get all the deductions you deserve.
Filing taxes as a small business owner can be complex, and professional help can make all the difference. At Picnic Tax, we connect you with an experienced online accountant who can handle your tax filing for you. Just upload your documents and information, and your accountant will prepare your tax return for income and self-employment taxes. With a clear, flat rate, you won’t be surprised by the costs, and you can rest assured that your tax returns as a solo entrepreneur are in the hands of a professional. Contact us today to find out more about how Picnic Tax can help you handle your taxes efficiently and precisely.