Important tax aspects of operating your business as a sole proprietor

If you’re in business for yourself as a sole proprietor or plan to start a business, you need to know about the tax aspects of operating your venture. Here are eight critical issues to consider:

Potential business deductions

1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Therefore, your business expenses are deductible against gross income and not as itemized deductions. Any losses are generally deductible against your other income. Additionally, they’re subject to special rules relating to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”

2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line.” Hence, it reduces taxable income rather than taking it “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.

3. You might be able to deduct home office expenses. You may be entitled to deduct an allocable portion of certain costs. For example, if you work from home, perform management or administrative tasks from a home office, or store product samples or inventory at home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

4. You can deduct 100% of your health insurance costs as a business expense. Meaning your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts more than 7.5% of your adjusted gross income.

Important tax payments

5. You should keep complete records of your income and expenses. Carefully record expenses to claim all your qualified deductions. Certain expenses require special attention because they’re subject to specific recordkeeping requirements or deductibility limits. That includes automobile, travel, meals, and home office expenses.

6. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000, while Medicare tax is only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income over $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax. Still, you can deduct half of your self-employment tax as an adjustment to income.

7. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15, and January 17, 2023.

8. If you hire employees, you need a taxpayer identification number, and you must withhold and pay over employment taxes.

Tax aspects of operating your business

Contact our RRBB accountants and advisors if you’d like more information or assistance with your business’s tax or recordkeeping aspects.

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