Insights | Oberlander & Co

Self-Employed & Taxes; What You Need to Know

Written by Oberlander & Co Team | September 12, 2023

What is a Sole Proprietorship?

Sole proprietorships are the simplest types of business structures. You're likely a sole proprietor if you’re self-employed, an independent contractor, and run your own business without any employees. You can read more about other business entity types here.

 

📝 Key Features 

  • Ownership: Owned and operated by a single individual. It is not a separate legal entity.

  • Taxation: Business income, deductions, and credits are reported on your personal income tax return. You may receive a Form 1099 for your work. This differs from other business structures like corporations or LLCs, which separate the business from the individual.

  • Liability: The business and owner are the same entity, making you personally responsible for business debts.

Examples of individuals who often operate as sole proprietors include Freelance Writers, Graphic Designers, Consultants, Handymen, and photographers.

🧾 How to File Your Taxes

As a sole proprietor, you typically report your business income and expenses on Schedule C of your tax return (Form 1040). You do not need to file a separate tax return for your business, but you must keep accurate records of all your business transactions. We recommend opening a bank account and signing up for QuickBooks. Related read: 7 Steps to getting your books in order. 

 

💰 How are you being Taxed? 

All the business income, deductions, and credits pass through to you, the business owner, and are reported on your personal income tax return.

1. You’ll pay income tax on business profits at your individual tax rate.

2. You will also pay self-employment tax to cover Social Security and Medicare. The income subject to self-employee “payroll” tax increases yearly, so check out the IRS website here for the most recent amount. It’s important to submit estimated taxes to the IRS and your state throughout the year.

 

✅ Who’s it For?

Ideal for individuals starting or running small, low-risk businesses. It’s the simplest form of business to set up, and it offers complete control to the owner.

 

⛔ Who’s it Not For?

This structure may not be suitable for those looking to raise capital, separate personal and business liabilities, or establish a more complex business structure. In those cases, forming a corporation or LLC might be more appropriate.

 

🏁 How to Form a Sole Proprietorship?

In most cases, you don’t have to file any special forms to become a sole proprietor. Simply engaging in business activities as an individual typically qualifies you as a sole proprietor. However, you may need to obtain local business licenses, and you should also register your “Doing Business As” (DBA) name if you’re operating under a name other than your own.

 

⚡Be Aware

While sole proprietorships are straightforward, they come with some downsides. You are personally responsible for any debts or liabilities the business incurs. This means that your personal assets, like your home or bank accounts, could be at risk if your business is sued or accrues debt.

 

You can mitigate your risk exposure by forming a single-member LLC. A single-member LLC is operating using the same framework. The only difference would be that you’re working under an LLC. While an LLC generally offers liability protection, the fact that this is a disregarded entity may change the legal status, so please consult with a legal professional.