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Cracking the Code: Guide to Sole Proprietorship Taxes

November 13, 2023
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Embarking on the journey of entrepreneurship is filled with many thrills and challenges. As a sole proprietor, you’re not only managing marketing and team supervision, but also navigating your way through payroll, bookkeeping, and tax payments.

Luckily, with the support of an expert San Antonio TX CPA, like the ones at Gonzales Group, you will be able to understand the most effective way to approach your taxes. In this guide, we will help you understand the ins and outs of paying taxes as a sole proprietor.

What is Sole Proprietorship?

This business structure is a common choice among many small businesses. Sole proprietorship is a structure in which an individual owns and operates the entire business. This is the most straightforward business structure to form; therefore the taxes are similarly rather straightforward.

How is a Sole Proprietorship Taxed?

Sole proprietors are taxed at the individual income tax rate, much like they were taxed prior to becoming business owners. In IRS terms, this type of taxation is defined as “pass-through taxation,” as the tax liability “passes through” to the business owner on their personal tax return.

In this instance, business owners will complete a Schedule C which will then be filed with the personal income tax form.

How Does One Determine Tax Liability?

Rather than paying taxes on the full amount of the business’s income, sole proprietors will pay a sole proprietorship tax on the business’s profit (income minus expenses), regardless of the amount they withdraw. Similar to other business types, sole proprietors are able to deduct business expenses. However, it is imperative to accurately track expenses so as to not over or under pay.

So, What Can Be Deducted?

A benefit of taxes for small business is itemized deductions. This, in turn, decreases the overall tax bill. There are many expenses that may qualify as deductions. Below are some of the most common tax deductions for sole proprietors:

  • Health insurance deduction
  • Business vehicle usage and mileage
  • Self-employment tax
  • Home office deduction
  • Banking and insurance fees
  • Professional development
  • Business meals
  • Traditional IRA contributions
  • Phone and Internet services
  • Professional services

Many other deductions exist in addition to this list. Working with a San Antonio TX CPA can allow a sole proprietor maximize their deductions.

What Taxes Do Sole Proprietors Pay?

Sole Proprietors must pay the following:

  • Federal income tax
  • State income tax (as applies)
  • Self-employment tax
  • Quarterly state and federal estimated taxes
  • Sales tax (if applicable)

Don’t embark on your entrepreneurial journey alone! With the help of a San Antonio TX CPA from Gonzales Group, you’re certain to tackle your sole proprietor taxes head on. Contact us today for expert guidance in paying your taxes correctly.

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This post was written by Gonzales Group CPA


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