For many people, becoming your own boss and leaving daily commutes and the 9-to-5 behind is a dream come true. If you’re a go-getter with the professional chops and the perseverance to become a sole proprietor, running your own business can be life changing.
Of course, if you’ve only ever worked for corporations, you might not have the first idea how to go about properly managing bookkeeping duties or filing taxes for your new business. It’s in your best interest to find a tax preparer that has the expertise to set you on the right path, but there are a few things you’ll need to do on your own, as well. Here are several important tax tips every sole proprietor should be aware of.
1. Conduct precise bookkeeping. It is only to your benefit to dot every “I” and cross every “T” when it comes to your personal accounting. Precise bookkeeping can help you to track income and expenses in preparation for tax filings. You want to make sure you get paid in a timely manner, that you maintain needed cash flow, and that you get credit for all deductions you’re due at tax time.
Sole proprietors don’t usually have a ton of wiggle room between income and expenses, so you need to keep track of every penny, whether you use an old-school paper ledger or modern accounting software like QuickBooks. Keep in mind that your accountant or tax preparer may offer bookkeeping services.
2. Keep every receipt. As a sole proprietor, you can claim all kinds of deductions on your taxes, from a home office and internet service to the money you spend on supplies, computer equipment, and travel for work. However, if you ever get audited you’re going to have to provide proof of these expenses.
This is why it’s so important to keep receipts for every expense and provide them to your tax preparer. If you get in the habit of saving them, you can even set up a system of organization to break them into categories and sort them chronologically. This will save you a lot of time on data entry and tax preparation down the line.
3. Deduct business expenses. When it comes to filing taxes, you want to get as many applicable deductions as possible to offset your earnings and ensure you get money back each year. While you need to be careful not to raise any red flags by fudging and claiming questionable expenses (like family meals that you list as a business expense, for example), you should find a tax preparer that is familiar with your business to help you claim all relevant deductions for business expenses.
4. Deduct health insurance. If you are lucky enough to get discounted health insurance through a spouse, you won’t be able to claim this deduction, but you’re sure to save a ton of money overall. If, on the other hand, you have to pay for insurance out of pocket, you should absolutely claim it on your taxes as a way to offset costs. For many sole proprietors, this is their biggest annual deduction.
5. Understand self-employment tax. If you work for a company, your employer automatically removes all applicable taxes from your paycheck, including costs for Social Security, Medicare, and so on. As a self-employed person, you are still liable for these expenses, and you not only have to pay the employee portion, but also the employer side. Your accountant can help you tabulate anticipated expenses for self-employment tax, as well as write off the appropriate portion.
6. Prepare for an audit. There’s no telling whether or not you’ll be subjected to a random audit by the IRS one day, so it’s always best to prepare for the possibility. Sole proprietors are often under more scrutiny than the average business, simply because they’re more likely to comingle business and personal expenses.
If you’re raising red flags with outrageous deductions, an audit is almost assured at some point, but even if you’re on the up-and-up, you could still face an audit. Working with an experienced tax preparer can help you to get all your ducks in a row in case of an audit.
7. Work with an experienced accountant. It’s not enough to find a tax preparer to help you with your annual filing. As a sole proprietor, you really need an accountant that has experience working with your type of business so that you can make sure to pay all applicable expenses and include all relevant deductions when you file.
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