What Are Some Tips for Filing Taxes as a Sole Proprietor?

From claiming office deductions to keeping accurate records of business expenses, here are 11 answers to the question, “What tips do you have for filing taxes as a sole proprietor?”

• Never Forget the Home Office Deduction
• Keep Up with Record Keeping
• Hire a Financial Advisor
• Make Estimated Tax Payments
• Get a Free Business Bank Account
• Reserve Funds During the Year
• Keep Detailed Records of Your Transactions
• Stay on Top of the Changing Tax Laws
• Monitor Your Self-Employment Tax
• Separate Your Personal and Business Accounts
• Remember Your Maximum Deductions

Never Forget the Home Office Deduction

Even if you have a leased office space, you can and should deduct a portion of expenses related to your personal home under the home office deduction. You can deduct part of your property taxes, homeowner’s insurance, utility bills, internet, and other home-related costs as they relate to your home office. 

Often, sole proprietors forget this, as they assume their leased office space is all they can claim. That’s not true, and you may miss valuable deduction amounts. Check with your CPA, but to the extent, you actually work out of your home, even if part-time, make sure you’re deducting everything you can.

John Ross, CEO, Test Prep Insight

Keep Up with Record Keeping

When filing for taxes as a sole proprietor, ensure that you keep adequate, up-to-date records. Make this a continual practice throughout the year, so your return is error-free. Sloppy record-keeping could lead to unclaimed deductions or the risk of an audit. 

If you haven’t already, invest in some basic accounting software. We’re not talking about a program with all the bells and whistles; just be on the lookout for something inexpensive and user-friendly that helps you keep track of revenue and expenses.

Marcus Hutsen, Business Development Manager, Patriot Coolers

Hire a Financial Advisor

Filing taxes can be a nightmare when you’re new to the business world and figuring out what to do and how much you need to pay isn’t always easy. 

That’s why your best tip as a sole proprietor is to hire a financial advisor who will do all the right documents, find out the best way to save on taxes, know your rights, and make sure you’re doing everything correctly.

Denise Hemke, CPO, Checkr

Make Estimated Tax Payments

One key tip for filing taxes as a sole proprietor is to make estimated tax payments throughout the year to avoid a large tax bill at the end of the year. As a sole proprietor, you pay self-employment taxes, which include both Social Security and Medicare taxes. 

Making estimated tax payments can help you stay on top of these taxes and avoid penalties and interest for underpayment. 

You can use Form 1040-ES to calculate and make these payments. Be sure to keep detailed records of all your income and expenses, and consider working with a tax professional or using tax software to ensure that you are filing your taxes accurately and taking advantage of all the deductions and credits you are eligible for.

Sean Harris, Managing Editor, Family Destinations Guide

Get a Free Business Bank Account

As a sole proprietor, getting access to free business bank accounts and bookkeeping can simplify filing taxes. Services like Wave offer both for free, so it’s easy to keep personal and business finances separate while taking advantage of tax season deductions. 

By keeping detailed records and using a free bookkeeping service, you can guarantee that you’re claiming all deductions and avoiding mistakes that could lead to an audit or penalties. 

Doing this saves time and money in the long run while making tax filing less stressful. Overall, using a free bank account and bookkeeping service is a fantastic way to stay organized during tax time. While it may take some time to set up, the reduced risk of mistakes and maximized deductions put more money in your pocket.

Axel DeAngelis, Founder, Jumpcoast

Reserve Funds During the Year

If you are a new small business owner or if you manage a sole proprietorship besides a salaried position, the amount you owe in taxes at the end of the year may surprise you. This is the case, especially if you have had taxes and CPP payments automatically withdrawn from each paycheck in the past.

As a sole proprietor, you calculate your taxes and other obligations. If you wait until tax season and do not save money throughout the year, you may owe a large amount of money that is difficult to pay. It is helpful to include RRSP contributions in your budget, as they can offset the taxes you will incur.

Joe Troyer, CEO and Growth Advisor, Digital Triggers

Keep Detailed Records of Your Transactions

As a sole proprietor, it’s important to understand your tax obligations and to stay organized throughout the year to make the tax-filing process as smooth as possible. In order to achieve this, it’s crucial to keep accurate records of all your income and expenses. 

This will make it easier to calculate your taxable income and to claim all the deductions you’re entitled to. Keep receipts, invoices, bank statements, and any other documentation that relates to your business.

Damjan Tanaskovic, CMO, Localizely

Stay on Top of the Changing Tax Laws

Tax laws and regulations constantly evolve, so staying informed of changes that may affect your business is essential. Ensure you have copies of all required forms and documents and detailed records of income and expenses throughout the year. 

Attend seminars or take tax-related classes to stay abreast of any recent developments. Review any notices regarding changes in deadlines or other pertinent information. 

By staying organized and taking the time to familiarize yourself with changing tax laws, you can ensure that your filing process is smooth and efficient.

Gary Gray, CFO, Coupon Chief

Monitor Your Self-Employment Tax

As a sole proprietor, filing your business taxes does not just end with regular filing for your business, as would be the case with other business types. 

The IRS also expects you to file self-employment taxes. It is important to educate yourself on what entails this self-employment tax and how to file it correctly to avoid any future issues with the IRS or any restrictions on your business. 

Keep detailed financial records that you review while doing the tax filing.

Alvin Wei, Co-Founder and CMO, SEO Ant

Separate Your Personal and Business Accounts

One way to keep clear and accurate records of your business income and expenses is to use a separate credit card or bank account for your business. 

When you use a separate credit card or bank account for your business, you’ll have a clear paper trail of all your business transactions. This will make it easier for you to identify and categorize your business expenses and provide supporting documentation in the event of an audit. 

Separate accounts also help you avoid confusion or errors when reporting your expenses on your tax return. If your personal and business expenses are mixed, it’s difficult to determine which expenses are tax deductible. This way, you can avoid overstating or understating your income and expenses.

Jonathan Merry, Founder, Moneyzine

Remember Your Maximum Deductions

Maximize your sole proprietor deductions by keeping accurate records of all your business expenses and claim all eligible deductions. This includes deductions for business-related expenses such as supplies, equipment, travel, and home office expenses. 

To claim a home office deduction, you must have a dedicated space in your home that is used only for business purposes. You can deduct expenses related to healthcare, retirement savings, and business-related education and training. 

If you use a vehicle for business, you can also deduct expenses such as gas, maintenance, and insurance. It is important to note that not all expenses are deductible, and there are specific rules and limits for each deduction. 

To ensure that you are maximizing your deductions and avoiding any potential issues with the IRS, it may be helpful to work with a tax professional who can guide you through the process.

Nick Cotter, Founder, newfoundr

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