Being the owner of a small business is an exciting experience. You are the captain of your ship, and you have complete control over when and how you set sail.
However, as the April 15 tax deadline approaches, your confidence may fade, given the unfamiliarity with US tax laws. As a result, filing your taxes as an Indian who owns a sole proprietorship in the United States might be stressful.
This article will show you how to avoid such eight blunders while filing as a sole proprietor and do your taxes swiftly.
Who is a Sole Proprietor?
A sole proprietor is an individual who owns and operates their own business. For instance, you are a sole proprietor if you work as a freelance writer. However, you must obtain the necessary licenses and permits by industry standards. Your business income is your income, and you are responsible for paying taxes.
Eight Pitfalls to Avoid While Filing as a Sole Proprietor
If you are a sole proprietor, you’ll need Form 1040 to pay your taxes and declare your earnings on Schedule C. Self-filing taxes might be intimidating. However, it’s much more daunting if you file as a sole proprietor.
We have compiled a list of eight common blunders sole proprietors make while filing taxes:
1) Ignoring quarterly tax payments
In the United States, businesses must pay estimated taxes every quarter. The IRS will penalize you if you wait until April 15 to pay the taxes in full.
As a result, it is more prudent to account for your profit and loss and pay your taxes every quarter. You can withhold a portion of your business income as taxes each month and send the IRS a quarterly tax payment.
2) Failure to meet tax deadlines
If you fail to pay your taxes on time, you will be subject to a penalty of 5% of your monthly taxable income. Furthermore, the IRS has the authority to fine you up to 25% of your total tax bill.
They can also charge you a 0.5% late fee for each month you don’t pay after the deadline. Request a personal tax extension if you are unable to meet the deadline. However, you must pay a portion of the outstanding balance by the initial date.
3) Cheating on your tax bills
According to an IRS survey of 2001, sole entrepreneurs underreported $68.5 billion in business income. As a result, you must provide an accurate tax estimate while filing as a sole proprietor.
If you earned more than $600 in the current fiscal year, the company that paid you is obligated to send you a 1099-MISC form and your paycheck.
They also provide a copy of the same to the Internal Revenue Service. As a result, you must accurately disclose your earnings to the IRS. Even if you don’t receive the 1099-MISC from the client or if it’s incomplete, make sure it’s updated before the tax deadline.
4) Failing to claim home office deductions
You are eligible for home office deductions while filing as a sole proprietor if you work from home. You can work from home in an office or a designated place.
Many business owners are hesitant to take advantage of this tax break. However, if you file as a sole proprietor, you can claim this deduction and save money on your taxes.
The IRS uses two formulas to compute the deduction amount: standard and simplified. Keep track of electricity bills, repairs, and other expenses for the standard deduction.
You can also claim $5 per square foot using the simplified formula. Therefore, the most you can receive for a 300 square foot home office is $1500.
5) Failing to claim deductions for business gifts
The gifts you offer your clients for branding purposes can help you save money on taxes. A $25 per person business gift deduction is allowed under the tax laws.
As a result, if you claimed $1000 in this category, including receipts and proof that the gifts were given to the required number of persons, you’re up for a rebate.
6) Confusing equipment and supply deductions
Business supplies include pens, paper, printer ink, notepads, etc. Equipment includes computers, software, and office furniture. Supplies should be reported on Schedule C, and equipment should be listed on a separate form 4562.
The IRS may not consider a deduction if you record supplies as equipment or vice versa. Furthermore, you can deduct the total cost of the equipment in one go. Alternatively, you might claim a portion of it each year.
7) Failure to track your expenses
If you keep track of every dollar you spend on your business, you can claim some of it as a deduction from the IRS. Hence, keep receipts and documentation to back them up.
For example, you can deduct not only your phone bills and travel insurance premiums but also web hosting, online courses, educational materials, and so on.
Thus, instead of scrambling to find receipts right before April, make it a practice to file them and keep track of your expenses.
8) Registering your firm as a wrong entity
If you end up paying more taxes as a sole proprietor, it’s wiser to change your business entity to an S-corporation. Similarly, if it lowers your tax burden, you can choose an LLC or C-corporation. Always consult your CPA or tax professional before making a decision.
Hence, by filing as a sole proprietor in the United States, you can take advantage of over 28 tax deductions. You can also put your tax savings to good use and go for business expansion.
If the IRS comes knocking on your door, prepare the necessary receipts and documentation to back them up. If you correct the aforementioned errors, you may soon find yourself staring at a sizable return.
Contact AOTAX if you are an Indian business owner wishing to file taxes as a sole proprietor. Over 2 million Indians have benefited from our assistance, at AOTAX, in filing their taxes on time.
Our tax planners and advisors will ensure that you get the most out of your tax returns and never miss a tax deadline.