Question by Ashley S: Do I need to be worried about taxes as a small business owner?
I started my small business this year. It is a sole proprietorship and I am the only owner/employee. It is looking like I’m not even going to break even this year as far as profit vs. expenses go. Will I still owe taxes? I am so new to the tax situation for businesses that I’m clueless and hence a little worried.
Best answer:
Answer by Frank
When you file your taxes at the end of the year, you will fill in a schedule C, where you will list your business income and business expenses.
Your schedule C income will be the difference between the two, and you will add it to your personal income, which will increase the income tax you will owe. If it comes out negative, it will reduce your personal income and reduce the taxes you will owe.
The IRS has some tests to distinguish between a real busienss that lost money and a hobby. You can’t deduct the costs of a hobby (they don’t reduce your personal income). See my source for how the IRS distinguishes.
Know better? Leave your own answer in the comments!
Being new to the subject, let me recommend a great investment that will pay for itself many times over. Buy an hour of time with a tax PRO to get their guidance. You’ll come away with many good ideas, and you will also know whether or not you should be doing your own work. Many people starting a business make a huge mistake: they assume because the business is new and small, that the decisions are easy. Big Mistake. It’s like saying the medical care for babies should cost a fraction of the cost charged adults. It doesn’t work like that… and for very similar reasons
Hello there,
From what you say, the business should not create an income tax liability for you.
A couple things you should become aware of.
First as the owner of a sole proprietorship you cannot be an employee for tax purposes. That is a good thing. As a business owner, you are liable for employment taxes on the wages of your employees. The employment taxes do not apply to the owner because under the tax rules, the owner cannot be an employee.
Next, when you file your individual income tax return next spring for 2010, you will add another page or two to your Form 1040 (individual return) to report the profit or loss from your business. That amount is netted against your other income in determining how much tax you owe. So if you also have wages from a job, the loss from your business with offset that and therefore reduce your taxes. The other side is also true. When your business has a profit that profit gets added with your other income possibly putting you into a higher tax rate.
I would suggest you sit down with someone knowledgeable about taxes and business record keeping, to discuss whether your bookkeeping is what you will need, what documents and records you should be maintaining, and what business options are open to you to consider because of your tax situation. A tax lawyer would be good for this. Also a CPA, other accountant and maybe even a tax return preparer. Before you get to the end of the year, you should have some guidance as to what you need to be doing. This is common with new business owners. Lawyers who work with start up businesses do this all the time. I believe it is very helpful because it gives you not only an idea of what to expect, but also some specific guidance as to what you should be doing in maintaining proper records for your business.
Later,
If you do not worry about it, and do not file any tax paperwork, then you will owe tax on all of the money you received. Expenses are not subtracted unless you file the proper paperwork. If you do worry about taxes, keep receipts, and file the proper paperwork to deduct your expenses, then you will not owe anything.
you will file this business activity on Sch C and if the ‘net’ amount is $ 400 or more you will also file a sch SE and pay your self employment tax, approx. 15.3% of your sch C net
half of that amount is a credit on your 1040 to reduce your gross income
When you complete your 1040 schedule C correctly and completely using your very good business records and if you do NOT have a NET PROFIT on on the schedule C you will owe any of the social security security or medicare taxes and you also will not have any taxable amount to be be entered on the 1040 tax form page 1 LINE business income or loss amount. It is possible end up with a loss amount on line 12 that would be subtracted from all of your other gross income on your 1040 income tax return and would reduce your taxable income amount.
All of your gross income from all sources of worldwide income will be reported on your correctly completed 1040 federal income tax return.
In general, taxpayers may deduct the ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
The independent contractor self employment income will be reported on the schedule C of the 1040 tax form and you will be responsible for the 15.3% of the social security and medicare tax on your net profit from the business operation you also may need to make some quarterly estimated tax payments for the tax year 2010. The last payment would be January 18 2011.
You would have to be sure that you handle your business deductions correctly for your business operation.
For instructions and forms go to the IRS.gov website and use the search box for publication 334 a very good place to start with examples.
Publication 463 Travel, Entertainment, Gift, and Car Expenses
Use the search box at the http://www.irs.gov website for Small Business and Self-Employed Tax Center
Filing Season Central is your one stop assistance center for filing your business returns. This includes Highlights of Tax Law Changes, Tax Tips, and more.
2 of the seven tax tips for starting a business enclosed below.
#4 Good records will help you ensure successful operation of your new business. You may choose any record keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
#7 Visit the Business section of the IRS gov website for resources to assist entrepreneurs with starting and operating a new business. Go to the IRS gov website and use the search box for the below referenced material
*Starting A Business
*Operating A Business
*Closing A Business
*Publication 4591, Small Business Federal Tax Responsibilities (PDF 470.1K)
http://www.irs.gov/
http://access.wa.gov/business/taxes.aspx
If you have a net loss, no you won’t owe tax.