As a sole proprietor, your business and personal incomes are considered one and the same. While that comes with some extra liability, it also comes with the fact that you’re the boss, so you don’t have to answer to an employer. You also have unlimited income potential, as you control the projects you work on. This kind of freedom is appealing to many business-minded individuals.
Use this last-minute tax guide to help streamline your tax-filing process and maximize your savings. Once your done, use our handy infographic at the end of this article to make sure you don’t miss any important tax deadlines.
Important Tax Dates to Remember
As a business of one, you likely work with several clients and will be receiving 1099s and other tax receipts for work performed throughout the year. Likewise, if you outsourced work to another independent sole proprietor, you’re responsible for claiming those payments on your taxes and issuing a 1099 if necessary.
The cut-off date for receiving and sending 1099s to contractors is January 31. Make sure your income reports reflect the correct amounts for gross earnings and payments to contractors. For a guide to filing 1099s when you employ independent contractors, click here.
Here are some other important tax dates to remember as a sole proprietor.
Annual Tax Return Deadline: It’s Not April 15 This Year
Usually, the tax return deadline for any individual is April 15, as long as it falls on a business day. In 2016, however, the deadline for your 2015 filing has been extended through Monday, April 18, due to Emancipation Day being celebrated on April 15 in Washington, D.C. If you live in Massachusetts or Maine, the delayed observance of Patriot’s Day further moves your deadline to April 19.
To avoid being late, make sure your tax return is postmarked or filed online by whichever deadline applies to you.
Quarterly Tax Payments
The IRS requires that taxes be paid as the income is earned; this especially applies to sole proprietors. Instead of having the luxury of an employer withholding taxes from your paycheck and paying them on your behalf, you have to pay a portion of your earnings every quarter.
You make estimated quarterly taxes using Form 1040-ES four times a year, with each payment due on the following dates:
- April 15*: First quarterly tax payment due
- June 15: Second quarterly tax payment due
- September 15: Third quarterly tax payment due
- January 15: Final quarterly tax payment due
*Again, because of the Emancipation Day holiday, your first quarterly tax due date of 2016 be April 18.
Calculating your quarterly payments depends on your income tax bracket and earnings. However, most experts recommend setting aside 20% to 30% of your income to pay toward estimated tax payments. It’s best to consult with a tax professional or CPA who can help determine the best amount for your personal situation. For more info, see our guide to quarterly tax payments.
Tax Return Extension Deadline
If you’re requesting an extension for filing a tax return, it must be sent in by the April filing date. Additionally, even if you plan to file an extension for your taxes, you’re still required to pay all (or most) of your tax balance that’s due by this deadline as well.
Once your tax-filing extension has been approved, you have until October of the same year (usually the 15th) to complete and submit your tax return.
Required IRS Forms
As a sole proprietor, there are three main IRS forms you have to fill out and include with your personal tax return. They are the Form 1040, Schedule C and Schedule SE. Here’s a breakdown of each form you need and why you need it.
Because the IRS views your sole proprietorship as an extension of you as an individual taxpayer, you’ll ultimately list your business’ income on Form 1040. You can’t use 1040A or 1040-EZ because you cannot report business income on those two forms. Fill this out as you normally would, and be sure to complete Schedules C and SE.
Schedule C (or C-EZ)
As a sole proprietor, you can run a business through your personal name or your Doing Business As (DBA) name, which is also known as a “fictitious business name.” Either way, fill in the top of the Schedule C using the name and address you use for your daily business operations. Then check the appropriate accounting method, which will be cash, accrual or other. Answer the “yes” or “no” boxes, and then input the gross sales you earned throughout the year under Part 1 Income.
If your business had expenses that were less than $5,000, and you use the cash accounting method, you can use Schedule C-EZ, which is a far simpler version of Schedule C.
Subtract any allowances or returns for refunds and any cost of goods sold. This will give you your gross profit for the year. Finally, add up your yearly expenses, and input them into the appropriate categories. Subtract this total from your gross profit, and you’ll end up with your net profit for the year.
If you earned $400 or more net profit in one year, you’ll also be required to fill out a Schedule SE, which will determine the tax amount on your self-employed income. Fill in the portion with your name, then use the flowchart to determine if you need to use the short form or long form. Carry over the numbers from the appropriate box on your Schedule C, then combine lines 1a, 1b and 2, and write the answer on line 3.
Multiply line 3 by 92.35%, and write the amount on line 4. Follow the instructions on line 5 to determine your SE tax and deduction for one-half of your SE tax. Transfer these figures to the appropriate lines on Form 1040.
Once you’ve finished filling in the appropriate tax forms, don’t forget to sign and date it before sending it off to the IRS. You don’t want to miss the filing deadline because you forgot to sign the document.
There are several different tax penalties that occur as a sole proprietor, and they can happen for two reasons: If you miss the tax filing deadline or miss an estimated tax payment. Each one varies depending on your type of situation.
If you miss the tax filing deadline, you may be hit with one of two penalties, an underpayment fee and any interest that accumulates. You may also be hit with a combination of them all. These include:
- FTF Penalty: The “Failure to File” penalty is 5% of the balance owed for each month you haven’t filed your taxes. This can go up to 25 months.
- FTP Penalty: The “Failure to Pay” penalty is 0.5% of your unpaid taxes for each month that your balance is outstanding.
- Underpayment fees may be assessed if you don’t pay your taxes by the filing date, or miscalculate and don’t pay enough of the balance owed.
- Interest fees will continue to accrue for any unpaid tax balance at a rate up to 3%, with interest that compounds daily from the original date of the return.
If you forget to pay an estimated tax payment by the quarterly due date, you’ll be required to fill out Form 2210, which will calculate a small penalty for late payments. The same penalty rules applied to the tax-filing deadline may also apply to late quarterly tax payments.
When possible, make any and all income tax or estimated tax payments as soon as you can, since waiting will only add further penalty and interest charges.
Last-Minute Filing Tips
The last thing to decide is whether to send in your return via snail mail or to file it online. Filing your tax return online can help you avoid any “lost in the mail” accidents and reduce the risk of other individuals physically intercepting personal information.
The IRS maintains relationships with many companies to assist filers with online returns, making online filing easy and secure; it’s also free for qualifying businesses. If you decide to mail in your return, make sure it’s postmarked by the due date. You might also consider purchasing other services that confirm its mailing and successful delivery.
If the tax-filing deadline sneaks up on you, and you find you’re not quite ready, it’s best to go ahead and file your taxes anyway and pay what you owe sooner rather than later. You can amend your return at a later date to give yourself extra time to correct any tax forms or additional expenses. This may cost an extra hundred dollars in fees, but it will save you from paying penalties and interest fees to the IRS.
If your interested in learning more about taxes for sole proprietors and other business entities, don’t miss the rest of our small business tax guides. As promised, be sure to download our infographic below, which includes all the forms and dates a sole proprietor needs to file.