Episode 31: In this episode, Timalyn focuses on preventative care for business owners. Today, she'll focus on sole proprietor taxes. She reminds her audience that over 90% of the clients she works with, who owe back taxes they can't pay, are business owners. Many of these clients are single-member LLCs, also referred to as sole proprietors. Let's listen to Timalyn as she continues her mission to fill the tax literacy gap, one taxpayer at a time.
Spotting the Red Flag
Timalyn begins by commenting about a common question she receives. "I've filed my personal taxes, but can you file the tax returns for my business?" This is a red flag. Individual tax returns are due in April, but returns for a some corporations and partnership are due earlier. If the person asking the question is a single-member LLC, the tax information related to the sole proprietorship should have been filed as part of the individual tax returns.
What is a Sole Proprietorship?
This classification refers to any business that's unincorporated. Any individual who sets up an unincorporated business is considered to be a sole proprietor. This would apply to an Uber or Lyft driver and many other types of individuals exchanging services for payment.
Many people don't actually realize they are a business, for tax purposes. This can lead to confusion and potential problems down the road.
What's the Difference Between a Sole Proprietorship and an LLC?
A Limited Liability Company (LLC) is a state-designation. There's no actual advantage relative to federal taxes when you're a single-member LLC.
A single-member LLC is the same as a sole proprietorship, at the federal level. It changes if there are multiple members of the LLC.
Timalyn explains the Federal 1040 tax form is used for both individuals and single-member LLCs. However, the LLC will also file the IRS Schedule C, as part of the tax return. This is what she referred to at the beginning regarding a red flag. There is no separate tax return for a single-member LLC (also known as a sole proprietorship).
The IRS Schedule SE is also an integral part of the tax return. This is the form used to calculate the self-employment tax liability. Timalyn recorded an episode on self-employment tax. You can also watch her YouTube video explaining how to calculate the self-employment tax liability. It's roughly 15.3% of income of your net income.
The tax rate for a sole proprietor is directly related to the tax rate for the individual's ordinary income.
You can use IRS Form 1040-ES to calculate your quarterly estimated tax payments. Timalyn explains quarterly estimated tax payments in Episode 21. If you're going to have a tax liability of $1,000 or more, you're required to make these payments. Remember, we have a pay as you go system. It has nothing to do with whether you received a tax refund last year. If you make more than the IRS standard deduction, you're going to have a tax liability.
A Quick Tip for W-2 earners with a Side Hustle
One way to deal with the issue of quarterly tax payments is to adjust your withholdings taken out of your W2-based paycheck. This can relieve the pressure of having to make these manual payments. Remember, if you're a sole proprietor this business income and your W2 earnings all go into the same pot for tax purposes.
For more information on filling out the IRS 1040-ES, watch Timalyn's YouTube video.
State Obligations with a Single-Member LLC
So far, Timalyn has focused on federal taxes. Now, let's briefly transition to state taxes. She uses Kentucky as a basis for the following information. It's important to note that each state is different, so check with your state's Department of Revenue.
Kentucky requires single-member LLCs to submit an Annual Report by June 30th of each year. This enables you to update or confirm basic information about your business. In Kentucky, it also requires a $15 fee as of the time of this recording.
Kentucky single-member LLCs also include the Kentucky Form 725 with their end-of-year tax returns. The current fee is $175.
Additionally, you may also have local tax requirements. Be sure to check with your local tax authority. In the Louisville area, it's the Metro Louisville Revenue Commission. Louisville requires businesses to submit Form OL-3, which is an occupational license. The tax rate is 2.2% on your net profit.
In summary, single-member LLCs are sole proprietors and have specific forms required for taxes. Rather than trying to know everything you need to know about taxes, Timalyn recommends you work with a qualified tax professional whom you trust. They will be able to make sure the proper forms are accurately completed. If you'd like help determining which type of tax professional to hire, please listen to Episode 23 and Episode 16.
If you'd like to learn more, consider purchasing Timalyn's course: Business Taxes 101. She'll teach you about the other business entities and the obligations required for each.
Please consider sharing this episode with your friends and family. There are many people dealing with tax issues, and you may not know about it. This information might be helpful to someone who really needs it. After all, back taxes shouldn't ruin their life either.
As we conclude Episode 31, we encourage you to connect with Timalyn on social media. You'll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.
Remember, Timalyn Bowens is America's Favorite EA and she's here to fill the tax literacy gap, one taxpayer at a time. Thanks for listening to today's episode.
For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .
If you have any feedback, or suggestions for an upcoming episode topic, please submit them here: https://www.americasfavoriteea.com/contact.
Disclaimer: This podcast is for informational and educational purposes only. It provides a framework and possible solutions for solving your tax problems, but it is not legally binding. Please consult your tax professional regarding your specific tax situation.
