Tax season is rolling in again.
Although employees tend only to think about taxes once a year when it’s time to file the return, business owners (incorporated or not) need to think about it more often.
Most employees never think about the regular tax payments they are making to the government. It happens automatically through withholding taxes.
But business owners need to think about taxes year-round. Not only do they need to make estimated quarterly payments, but it’s also important to put some thought into a tax strategy.
The corporate structure you choose for your business (i.e., sole proprietor, LLC, corporation, etc.) can have a big impact on how you file your taxes.
Here we’ll look at how sole proprietors should use Schedule C to file their taxes.
Who Needs to File Schedule C?
Any business owner operating as a sole proprietor needs to file Schedule C with their 1040. Unless a separate tax election is made, single-member LLC owners need to file Schedule C.
The Schedule C form will be attached to your personal tax return to report income or losses from any business that you operated during the tax year.
Very few people still fill out tax forms by hand and file paper returns. Instead, they prefer to use software to e-file or hire a professional to handle the job.
Properly filling out Schedule C forms can be quite complicated. The form is not so straightforward, and mistakes can be costly. Not knowing what you’re doing can lead to not paying the right amount, either overpaying or underpaying (which can bring penalties).
Because filling out Schedule C can be complicated, Founder’s CPA recommends getting help from an experienced professional who understands your business.
Where to Start with Schedule C?
The first step is typically gathering all of your information. Whether you prepare your taxes alone or get professional help, you need to put your info together.
Which info is needed?
Business Income (sales)
What were your sales for the year, including returns and allowances? Your business’s accounting program should be able to give you this info rather easily.
Cost of Goods Sold (COGS)
How much did it cost your business to fulfill those sales?
Depending on your inventory valuation method (which needs to be explained on your form), you probably also need to consider any changes in inventory throughout the year.
You also need to consider the cost of any non-inventory labor, material, and supplies.
Other Business Expenses
In addition to COGS directly related to production and fulfillment, most businesses have other expenses necessary to run the business properly.
- Utilities (including phones, electricity, computer rental)
- Insurance for property, liability, or disability
- Office supplies
- Wages and expenses for contractors not considered in COGS
- Interest paid
- Other miscellaneous expenses that are hard to classify elsewhere
Calculate gross profit and gross income
Once you’ve got all that information together, the calculations are relatively straightforward:
- Gross Profit = Net receipts – COGS
- Gross Income = Gross Profit – other income and credits
Your tax prep software will probably calculate this information for you.
Now for Net Income
Now is the time to consider those other business expenses. In addition to the list above, don’t forget to consider:
- Employee benefits and insurance
- Legal and professional fees
- Use of a home office (to be taken proportionally or calculated using a flat rate per square foot of business use space)
- Vehicle use – typically deducting at the standard IRS mileage rates. It does need to be justified with mileage or driving records.
The end result from Schedule C will be added to your 1040 as other income.
Other Corporate Structures
You might derive some tax benefits from “upgrading” to an LLC from a sole proprietorship or switching from an LLC to an S-corporation. Both situations can bring advantages, depending on the size of the company and the amount of money you’re earning.
If you make enough income (typically $100k+), it’s worth considering making a separate tax election and filing as an S-corporation. Doing so can help you save on self-employment taxes by paying yourself a “reasonable” salary from the business’s profits.
Expert Tax Help for Sole Proprietors
Preparing your own taxes as a sole proprietor can be a relatively straightforward experience if you run a fairly simple operation.
However, even for a simple operation, it can be time-consuming and complex to gather all the necessary info and make sure you’re not missing anything important. This is time not spent working on your business.
Furthermore, handing off your business’s tax preparation to an expert can pay off in other ways. They see many returns a year; have insight into a variety of businesses; and know the laws, deductions, and credits inside and out.
The experts at Founder’s CPA can even help you take a more long-term, strategic approach to your taxes. Set up a free consultation with one of our business tax experts.