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Small Business Development Center
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Consider your business structure

November 04, 2013

Many small-business owners choose sole proprietorship as their legal structure.

It is the easiest and least expensive way to go. The IRS requires a sole proprietor to report all business income or losses on their personal income tax return. The business itself is not taxed separately.

SAN ANGELO, Texas — Many small-business owners choose sole proprietorship as their legal structure.

It is the easiest and least expensive way to go. The IRS requires a sole proprietor to report all business income or losses on their personal income tax return. The business itself is not taxed separately.

The only difference between reporting income from a small business and reporting wages from a job is that you must list your business’ profit or loss information on a Schedule C form (Profit or Loss from a Business), which you will submit to the IRS along with Form 1040. The small-business owner will be taxed on all profits of the business, total sales minus expenses, regardless of how much money was actually withdrawn from the business. In other words, even if you leave money in the company’s bank account at the end of the year, you must pay taxes on that money.

You can deduct expenses in the same manner as any other type of business. You are allowed to deduct any money spent in pursuit of profit, such as startup costs, operating expenses and product advertising costs, as well as business related meals, travel and entertainment expenses. Keep accurate records for your business that are clearly separate from personal expenses. Have separate checkbooks for your business and personal expenses and pay for all business expenses out of the business checking account.

Since you don’t have an employer to withhold income taxes from your paycheck, it is your job to set aside enough money to pay taxes on any business income brought in over the year. You must estimate how much tax will be owed at the end of each year and make quarterly estimated income tax payments to the IRS.

Sole proprietors must make contributions to the Social Security and Medicare systems. These contributions are called self-employment taxes. These taxes are equivalent to the payroll tax for employees of a business. While regular employees make contributions to these two programs through deductions from their paychecks, sole proprietors must make contributions when paying their income taxes.

Another important difference between employees and sole proprietors is that employees only have to pay half as much into these programs because their contributions are matched by their employers. Sole proprietors must pay the entire amount themselves.

As a small-business owner you will need to research what type of business structure will work best for you. The Small Business Development Center is here to help and there are many accountants and accounting firms that are available throughout San Angelo and the Concho Valley.

“Business Tips” was written by Paul Howard, Business Development Specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.

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    Paul Howard Business Development Specialist and Certified Business Adviser IV

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