If you’re a sole proprietorship, your business taxes and personal taxes are treated as one.
That’s because a sole proprietorship is a pass-through entity, where any business profits and losses pass through to you. In the eyes of the IRS, you are your business, and your business is you.
Understanding the tax implications of your sole proprietorship is the key to success. After all, no one wants an enormous (and surprising!) tax bill come April.
Here’s a rundown of sole proprietorship taxes that you need to know.
Federal income tax
When filing income taxes, sole proprietors need to fill out Schedule C (Form 1040) on top of the standard Form 1040. Form 1040 is for your personal income while Schedule C reports any profit or loss from your business.
Your tax bracket will be based on your personal and business income.
So if your business profited $25,000 and you also earned $50,000 as a traditional W-2 employee, your total income would be $75,000. That’s the number you’d use to figure out your taxable income and tax rate.
Next up, you’ll have to pay self-employment tax—also known as your Medicare and Social Security taxes.
When you’re paid as a W-2 employee, your employer covers half of these taxes. Sole proprietors, on the other hand, must pay the whole thing themselves.
But there is a bright side: you can deduct the portion that an employer would have paid on your Schedule C—that helps lower your final tax bill!
Here’s how self-employment taxes break down in 2019:
- You’ll pay 12.4% in Social Security tax for the first $132,900 of your income.
- Then you will pay 2.9% of your total income for Medicare tax.
- If your total income is greater than $200,000 (or $250,000 if you are married filed jointly, or $125,000 if you are married filing separately), you will pay an additional 0.9% on any amount over the threshold. This is called the Additional Medicare Tax.
Struggling to figure out just how much you owe? Don’t fret—follow Gusto’s four-step self-employment tax guide to find the right number.
Federal estimated taxes
Since there’s no employer withholding taxes for you when you run your own business, you’re responsible for regular tax payments.
Sole proprietors don’t deal with the IRS just during tax season. You’ll pay estimated taxes every quarter—unless you think you’ll owe less than $1,000 to the IRS when you file taxes.
To file estimated taxes:
1. Determine how much money you owe this quarter
This form estimates your income tax and self-employment tax. When estimated taxes are due, you will pay this estimated amount.
2. Submit your estimated taxes
You can pay in a number of different ways, including paying online at IRS.gov, through the IRS2Go app, and via check, money order, or cash.
Quarterly estimated taxes are due by the following dates*:
- January 1–March 31: April 15
- April 1–May 31: June 15
- June 1–August 31: September 15
- September 1–December 31: January 15 of the following year, unless you file your yearly taxes and pay the remaining balance by January 31 of the following year.
*If any of these dates fall on a Saturday, Sunday, or legal holiday, the due date will move to the next business day.
State income and estimated taxes
If your state has income tax, you’ll need to take care of that through estimated taxes as well.
Each state has its own forms, guidelines, and deadlines for income and estimated taxes, though, so make sure to check with your accountant on your state tax obligations.
You may also need to collect and pay sales and use tax for any products and services you sell.
This is a state tax, and again, requirements and rates differ by state. Check with your state’s department of revenue to determine what, when, and how much tax you need to collect and pay.
What if I have employees?
If you hire help for your business, taxes will be slightly more complicated—but preparing for your company’s new addition in advance can make the process easier.
For W-2 employees, you will be responsible for withholding employment taxes and filing a Form W-2 for each employee. Your employee pays some of the taxes, and others will be paid by you, the employer.
Here are the main taxes you’ll be dealing with when you have employees:
- Social Security tax: For income under the Social Security wage base ($132,900), you’ll pay 6.2% in Social Security taxes and also take out 6.2% from your employee’s paycheck.
- Medicare tax: Just like Social Security taxes, you and your employee will split the 2.9% Medicare taxes down the middle.
- Additional Medicare Tax: If your employee’s income is over $200,000, you’ll need to withhold an additional 0.9% from their pay.
- Federal unemployment taxes: These taxes are typically 6% of the first $7,000 of each employee’s wages and are paid exclusively by the employer. You can, however, get a credit that effectively reduces this tax rate to 0.6%.
- State unemployment taxes: Each state has a different rate, and like federal unemployment taxes, these are paid by the employer. Find the employment laws for your state here.
- Local taxes: Some cities, counties, and municipalities may have their own taxes that the employer is required to pay or withhold from their employees’ paychecks.
- Income taxes: Employers must withhold the proper state and federal income taxes. To determine the correct amount, use the IRS’s withholding tables and your state’s withholding tables or get payroll software to do it for you.
If you’re hiring an independent contractor, the process is much simpler. You generally don’t need to withhold or pay taxes on their behalf. But if you pay them more than $600 per year, you need to file a 1099-MISC.
Are there ways to save on my sole proprietorship taxes?
As the famous saying goes, nothing is certain in life but death and taxes. But, there could be potential tax benefits if you choose to have your sole proprietorship be taxed as an S corporation.
If you’re unsure which option is best, Gusto’s guide to business structures can help you understand the benefits and drawbacks of sole proprietorships, LLCs, S corps, and other business structures.