Whether you’re starting a business as a single member LLC or sole proprietor, there are some tax considerations to keep in mind. Holly Lieser, senior manager at 415 Group, explains the importance of recordkeeping and working with a trusted advisor—even if you have a qualified individual performing these duties in-house.
While many businesses were forced to close due to the COVID-19 pandemic, some entrepreneurs started new small businesses. Many of these people start out operating as sole proprietors. And that trend is continuing.
Here are some tax rules and considerations involved in operating with that entity.
The pass-through deduction
To the extent your business generates qualified business income (QBI), you’re eligible to claim the pass-through or QBI deduction, subject to limitations. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. You can take the deduction even if you don’t itemize deductions on your tax return and instead claim the standard deduction.
Reporting responsibilities
As a sole proprietor, you’ll file Schedule C with your Form 1040. Your business expenses are deductible against gross income. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.
Self-employment taxes
For 2023, you pay Social Security on your net self-employment earnings up to $160,200, and Medicare tax on all earnings. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 on 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.
Quarterly estimated payments
As a sole proprietor, you generally have to make estimated tax payments. For 2023, these are due on April 18, June 15, September 15, 2023 and January 16, 2024.
Home office deductions
If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.
Health insurance expenses
You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.
Keeping records
Retain complete records of your income and expenses so you can claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.
Saving for retirement
Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re withdrawn. A SEP plan requires less paperwork than many qualified plans. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.
We can help
Contact us if you want additional information about the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements.
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Anytime a new entity is structured, the owner(s) will have to plan for tax considerations like the pass-through deduction, reporting responsibilities, home office deductions, saving for retirement and more. Every business starting out needs to consider these not only before launching, but also throughout the life of the business.
If you, as the business owner, have the time, experience, and resources to dedicate to these items, you can do many or all of these items on your own. Other times, it’s best to either have an internal person take on the responsibility or outsource to a firm like 415 Group.
Regardless of how you handle tax rules and related considerations, recordkeeping is one of the most important items to consider. In fact, every item listed in the main article will depend on accurate and timely recordkeeping.
Small business owners often overlook the importance of recordkeeping. They tend to know what is happening, but often bypass documenting transactions. At 415 Group, many of our clients use QuickBooks to keep their financial information organized. There are many other accounting software programs available for recordkeeping, so you just need to find what works best for you—and be consistent with it.
At 415 Group, we can help small business owners and high-growth startups by providing accounting and consulting services to every aspect of a new business. This includes services from QuickBooks consulting to tax compliance. That way, owners can focus on what they do best—running their business—instead of being bogged down in recordkeeping and staying on top of tax rules.
If you’re gearing up to launch your own business, reach out to us today to find out how we can help.