Explaining Sole Proprietor Taxes: 8 Things You Should Know

The structure of your business determines your tax regulations and requirements. As a result of this, your company must be fully aware about how they must submit their taxes when the time comes to do so. Sole proprietor taxes are not overly complex but the laws are clear and strict.

In particular, what if you are a sole proprietor of your business venture? Do you understand what the estimated taxes for this type of organization are? It’s always better to be prepared in this case, rather than remain in the dark, as you don’t want your company, and thus its various employees, to suffer any financial setbacks as a result of lacking knowledge on this subject.

As with any company, you will, of course, have to ensure that all of your finances are properly organized, and this will even include the funds that are related to the acquisition of business, in addition to the expenses related to the business you are currently running.

You will get a clearer understanding of sole proprietor taxes, and everything that goes along with it, by making note of the points below.

Defining sole proprietorship

The first order of business is to understand what a sole proprietorship is in the first place. The common definition for it is as follows:

A sole proprietorship, also known as a sole trader or a proprietorship, is an unincorporated business with a single owner who pays personal income tax on profits earned from the business. (Investopedia)

The next step is to consider what this means when it comes to filing your taxes.

Estimated taxes required

An individual that is a sole proprietor of their business is responsible for the entire company, and this is particularly the case when it comes to the finances. This means that you have to file quarterly taxes, and you need to do so by understanding exactly what estimated taxes you have to pay. Still, there is also the opportunity given to you by the IRS to submit one estimated tax payment that encapsulates the whole year.

You thus need to keep into consideration the following two factors:

1. Self-employment taxes

Given that you solely own your business, you are subject to self-employment taxes. There is a combination of factors that go into the estimated taxes, and these include your annual gross income, your yearly credits, taxes, and deductions.

2. Federal income taxes

Federal income tax generates the government’s tax revenue, and it’s important to remember that as a business, it is the state that you are located in that requires you to file your taxes.

While you will be filing it as a self-employment tax, it is important to remember that it is, in the bigger picture, a federal income tax that you are obliged to pay.

Having all necessary files organized

As a business, and regardless of your structure in this one instance, you must have all of your necessary files organized far in advance of the tax deadline. After all, you want to ensure that when the time comes to fill out the necessary paperwork, you do not have to scramble for information last-minute – this will only cause chaos within your organization.

Thus, it is worthwhile to seek the advice of financial experts, as well as have an internal accounting department, that keeps tabs on all of your financial endeavors. This should include information such as what money your company has acquired, and even what funds have left the organization, such as for equipment financing.

Tax return process

Tax returns refer to the funds that you will receive back, once your business has filed its taxes that accounted for the various year-to-date expenditures. This step is an important follow up from the previous point, and if you have accounted for all of the necessary expenses, including your industrial equipment financing, among other things you are likely to receive a certain amount of money back, especially if you owe less than the estimated taxes required.

Of course, you will receive this only after you have submitted everything.

Depending on the state

Depending on the state where you are operating your business, the taxes you must pay will slightly differ. It is only natural that every single entrepreneur wants to operate a company in a location where they don’t have to pay significantly high taxes, and this currently includes Wyoming, Alaska, South Dakota, Florida, Montana, among a few others.

Remembering the tax submission deadline

As an organization, and especially as the owner, it is your responsibility to ensure that you do not miss the tax submission deadline. Even if you have a highly skilled team that is compiling all of the necessary files and getting it ready for submission, you must ensure that it has been sent through. For the current year, the deadline is April 15th, and it would be wise to have everything organized far in advance, as was previously mentioned.

Consequences for missing the deadline

If your business were to miss the deadline, there will always be a penalty associated with it. There are different levels of severity depending on the duration of time that you go without submitting your files, and the fee will only grow bigger the longer you leave it unattended.

Rather than be flagged by the IRS, and put your company and its employees into disarray, remember the aforementioned deadline for submitting your taxes.

A sole proprietor business cannot file their taxes like a corporation, general partnership or even the way a non-profit organization would deal with their taxes. Remember to take into consideration the exact steps you have to follow in order to ensure that you get the most out of your tax returns.

At the end of the day, one of your biggest business goals will always be to make profit. This means learning how to efficiently organize your company’s expenses! Consider everything from previous equipment loans, company entertainment expenditures, and other financial endeavors, alongside getting help from financial experts in order to get the most out of your tax returns. This can put you and your company in the best possible position going forward.

Timothy Kelly

Timothy Kelly

Chief Editor at SmallbizStar
Tim has been a writer for over 20 years covering financial markets and small business.

In addition to writing about the financial markets, Mr. Kelly writes extensively about digital marketing and SEO.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine.

Contact Tim tim.kelly@smallbizstar.com
Timothy Kelly

Timothy Kelly

Tim has been a writer for over 20 years covering financial markets and small business. In addition to writing about the financial markets, Mr. Kelly writes extensively about digital marketing and SEO. Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art. Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York. Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine. Contact Tim tim.kelly@smallbizstar.com