Experienced Tax
Accountant –There are several important rules that you should be aware
of sole proprietorship.
(1) For income tax purposes, you will report your income and
expenses on Schedule C of your Form 1040. The net income will be taxable to you
regardless of whether you withdraw cash from the business. Your business
expenses will be deductible against gross income (i.e., “above the line”) and
not as itemized deductions. If you have any losses, the losses will generally
be deductible against your other income, subject to special rules relating to
hobby losses, passive activity losses, and losses in activities in which you
weren't “at risk.”
(2) You may be able to deduct office-at-home expenses. If
you will be working from an office in your home, performing management or
administrative tasks from an office-at-home, or storing product samples or
inventory at home, you may be entitled to deduct an allocable portion of
certain of the costs of maintaining your home. And if you have an
office-at-home, you may be able to deduct commuting expenses of going from your
home to another work location.
(3) You will be required to pay self-employment taxes. For
2015, you will pay self-employment tax (social security and Medicare) at a
15.3% rate on your net earnings from self-employment of up to $118,500
($117,000 for 2014), and Medicare tax only at a 2.9% rate on the excess. An
additional 0.9% Medicare tax (for a total of 3.8%) will be imposed on
self-employment income in excess of $250,000 for joint returns; $125,000 for
married taxpayers filing separate returns; and $200,000 in all other cases.
Self-employment tax is imposed in addition to income tax, but you can deduct
half of your self-employment tax as an adjustment to income.
(4) You will be allowed to deduct 100% of your health
insurance costs as a trade or business expense. This means your deduction for
medical care insurance won't be subject to the limitation on your medical
expense deduction that is based on a percentage of your adjusted gross income.
(5) You will be required to make quarterly estimated tax
payments. We can work with you to minimize the amount of your estimated tax
payments while avoiding any underpayment penalty.
(6) You will have to keep complete records of your income
and expenses. In particular, you should carefully record your expenses in order
to claim the full amount of the deductions to which you are entitled. Certain
types of expenses, such as automobile, travel, entertainment, meals, and
office-at-home expenses, require special attention because they are subject to
special recordkeeping requirements or limitations on deductibility.
(7) If you hire any employees, you will have to get a
taxpayer identification number and will have to withhold and pay over various
payroll taxes.
(8) You should consider establishing a qualified retirement
plan. The advantage of a qualified retirement plan is that amounts contributed
to the plan are deductible at the time of the contribution, and aren't taken
into income until the amounts are withdrawn. Because of the complexities of
ordinary qualified retirement plans, you might consider a simplified employee
pension (SEP) plan, which requires less paperwork. Another type of plan
available to sole proprietors that offers tax advantages with fewer
restrictions and administrative requirements than a qualified plan is a
“savings incentive match plan for employees,” i.e., a SIMPLE plan. If you don't
establish a retirement plan, you may still be able to make a contribution to an
IRA.
If you would like any additional information regarding the
tax aspects of your going into business, or if you need assistance in
satisfying any of the reporting or recordkeeping requirements, please give me a
call. I hope you find this summary helpful. I look forward to hearing from you. Click this link to
view our YouTube video http://youtu.be/EYJdQtbPZAI
Amare
Berhie
(651)
621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
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