A sole proprietorship is the most basic form of business structure. This is the easiest to start. As you are the sole owner of the company, you are fully responsible for the success or failure of the business. Any profits you generate will pass through the owner and so would the losses. The owner of the business will be responsible for the business debts if the business is unable to generate any profits or has any unpaid debts.
Eg: John Doe is a consultant. His name of the company will be John Doe. Therefore, if there are any business litigation law suits or legal action initiated – John Doe’s personal assets become liable for the company debts.
Below is a brief summary of benefits and disadvantages of sole proprietorship
Advantages of a Sole Proprietorship:
All profits will pass through to the single owner of the business.
Easy to start and setup.
Less paperwork is involved for start-up.
The owner can take independent decisions on the future of the business and has full control.
Simplified taxation as compared to other forms like S Corporation and C Corporation. The sole owner needs to only prepare one Schedule C form along with personal tax returns.
No double taxation as in corporations. The owner pays taxes based on the profits generated and this pass through his personal tax returns.
Disadvantages of a Sole Proprietorship:
The owner is fully responsible for business debts and liabilities incurred by the owner. The owner may be personally held responsible for any tax debts, business debts which may be unpaid by the business. Therefore, careful consideration needs to be made before starting your business as a sole proprietor. In short, the owner has unlimited personal liability.
High risk – as the owner is the only person managing and running the business, any small absences from work may highly disrupt the day to day functioning of the business. There is also no division of responsibilities. He/she alone will be fully responsible for the success or failure of the business.
Scalability of the business is limited as there is limited capital available from the owner’s personal funds or from borrowed funds granted to the owner. This may limit the growth of the business.
Succession planning and business continuity may be a serious concern. Upon the death of the owner, the business will be terminated and will not continue unless proper transfer procedures are followed to be passed on to the heirs. Upon transfer, to family or heirs, a new sole proprietorship is created
Taxes for a sole proprietor OR Single member LLC OR Sole Owner
As a sole proprietor, you need to pay self-employment taxes due each quarter and file a Schedule C end of the year along with your personal tax returns. It’s a relatively simple process and IRS has made it very easy for business owners to either pay self-employment taxes via their EFTPS website or can be paid via credit card.
What is Self-Employment Tax?
Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who are self-employed. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
You can figure self-employment tax (SE tax) yourself using a form available on the IRS website -Schedule SE (Form 1040). Alternately you can consult with a tax professional who can help determine your self -employed tax liability for the quarter.
How sole proprietors/self- employed individuals taxed?
Self-Employment Tax Rate
As an employee, you pay half of the 15.3% tax and your employer pays half of the tax. As a sole proprietor, you are responsible to pay both the employee and employer portion. The following is the summary of various taxes self-employed individuals pay.
The tax rate for self-employed income is 15.3% which mainly consists of 12.4% for social security up to a certain income ceiling ( above which there is no tax) and 2.9% for Medicare with no upper-income limit or ceiling. All self-employed income is reported along with a 1040 income tax return and Schedule C.
Self-Employment Tax Deduction
50% of what you pay as a self-employed tax payer can be claimed as a tax deduction.
Your net profit for the current year is $100,000. Your net earnings as per the current calculation would be =$10,000*0.9235=$9,235
Your self-employed tax in this situation would be $9,235
Your self- the employed tax would be $9,235*15.3%=$1413.
Therefore, your self-employed tax deduction would be 50% of $1413 =$706.5. This amount can be included as an adjustment to your income which will further reduce your taxes.
Self-Employment Health Insurance Tax Deduction
As a self -employed individual, you can take 100% of health insurance premiums (medical and dental) that you paid as a sole proprietor. This you can include it on your tax return as an adjustment to your adjusted gross income. This is not part of your self-employed income on your Schedule C.
To qualify for this deduction
You should have no other health care coverage.
You should have business income. If your business is under loss or has no income, you cannot get this tax deduction.
If you’re one of the millions of self-employed people who have to pay for their own health insurance for themselves and their families, you may be entitled to a special tax deduction. If you are, be absolutely sure you take it because it can be one of the largest deductions you have.
As a self-employed individual, you may be allowed to 100% of health insurance premiums as a deduction. This includes coverage for self-employed individual, families and any dependents
Please note that this is not a business deduction. This is a personal deduction for the self-employed. This deduction can be applied only to federal, state or local taxes but not the self-employment taxes.
The following are the conditions to qualify for this deduction:
No Other Health Insurance Coverage: You are not eligible for this coverage if you are covered under your spouse’s employer or in some other health insurance plan maintained by your employer.
Business Income: You can offset this only from the income earned from your business. If your business is making a loss this year or earns no revenue, you are not eligible for this deduction.
Multiple businesses: If you own multiple businesses, you cannot combine income from all businesses to meet the income limit. You can only use the income from a single business you designate as a health insurance plan sponsor.
Designating Your Plan Sponsor
If you meet the above conditions and if you qualify, you can claim the health insurance deduction either as an individual or your business can obtain it. If you purchase it under any of your businesses’ name, then the business will be named as the plan sponsor.
You can also obtain health insurance under your name and still get self-employed health care deduction.
To provide maximum benefit, you can choose any of your multiple businesses. The most beneficial would be choosing the businesses with the highest income.
Alternately, if you have multiple businesses, you can choose medical insurance for one company and dental insurance for another company. This will enable you to deduct 100% of the premiums of each policy subject to few income restrictions. This is beneficial if there is no single business that generates sufficient income to absorb the insurance premium costs.
Tax reporting of healthcare insurance deduction.
As this is a personal deduction, it is directly entered on your form 1040 instead of Schedule C-Business income. If you itemize your deductions and do not deduct 100% of health insurance deduction then you can include the rest as medical expenses on Schedule A-Itemized schedule. This is subject to 10% of adjusted gross income. This may be a better option if your health insurance premiums exceed your business income.
Who is required to pay self- employed tax
You are required to pay self-employed tax if you meet either of the following 2 conditions:
Your self-employment net earnings were at least $400 or more this year.
You had church employee income of $108.28 or more
How can you make a payment for self-employed taxes?
IRS has made it very easy for tax payers to pay taxes online. There are many options available.
We are providing only the most frequently used options. For a detailed list, you can visit the following IRS link
Direct Pay: This offers taxpayers free and easy way to pay. Direct pay provides you a direct confirmation. The amount also gets directly debited from your checking savings account.
Pay by debit or credit card: The link below has various payment processors that allow debit or credit card payments.
Use IRS2Go https://www.irs.gov/uac/irs2goapp
This is the mobile app that allows you to pay with Direct pay and by debit/credit card. This app can be downloaded from Google Play, Apple app store or amazon.
Pay when you file: You can schedule this payment at the time you file. You can pay directly through your bank by clicking on the link below along with the date & amount of the payment. Ensure any tax due is paid by the deadline. https://www.irs.gov/uac/pay-taxes-by-electronic-funds-withdrawal
EFPTS: You can use the link below and register via EFTPS website. You will receive password and PIN via postal mail. You can then activate it.
Pay by check or money order. You can make the check payable to US Treasury. Do not staple your check. Include your EIN or SSN number on the front of the payment.
Installment payment agreement: You can choose this option if you are unable to pay any tax due. There is a direct debit installment agreement option available. With this option, the amount will be directly debited from your bank account each month.
Owe more than you can afford? You can also choose offer in compromise. An offer in compromise may allow you to settle for less than the full amount due. You need to check the pre qualifier tool for an offer in compromise to check your eligibility for this program.
Whichever option you decide, ensure you pay tax timely to avoid penalties, interest, and notices from federal IRS.
When To Pay Estimated Tax
Payment needs to make each quarter. Below is the table with due dates. Please take note of the holiday rule. If there are any delays in payment, you may incur penalties and interest.
IF payment is sent by postal mail, the date of the US postmark would be considered as the payment date.
For exceptions to the dates listed, see Saturday, Sunday, holiday rule.
|For the period:||Due date:|
|Jan. 11 – March 31||April 18|
|April 1 – May 31||June 15|
|June 1 – Aug. 31||Sept. 15|
|Sept. 1 – Dec. 31||Jan. 16, next year2|
Saturday, Sunday, holiday rule. If the tax due date for an estimated tax deadline falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or a holiday.