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Every Form You Need For Filing Sole Proprietorship Taxes
Every Form You Need For Filing Sole Proprietorship Taxes
A sole proprietorship is a type of business that has only one employee, who is also the owner of the business. A sole proprietorship aims to promote entrepreneurship culture and motivate individuals to set up their businesses with minimal paperwork.
According to the IRS, a sole proprietor is a person that owns an unregistered business or incorporation. Together such a setup is referred to as a sole proprietorship. The individual owner is the sole decision maker in the industry, is the only employee and is responsible for paying the taxes, including estimated tax payments if necessary.
Sole proprietorship tax forms differ from individual income tax forms. We will have a look at all of them in detail here.
Table of contents
How to file taxes for a sole proprietorship
A sole proprietor pays a sole proprietorship tax on any profit from running the business. It's a simple income tax paid by the individual owner on any income arising from the business activities. The profits of the company in a sole proprietorship belong to the owner.
To file taxes on your sole proprietorship income, you must keep track of a few IRS forms like Form 1040, Schedule C, Form 940, Form 941, Form 944, etc. Let's have a look at the forms. Plus, any self-employment tax deductions need to be factored in and recorded.
Role of Schedule C in filing sole proprietorship taxes
Schedule C is merely a form that reports all your profits and losses. In the case of a sole proprietorship, you declare your profit and loss on Schedule C of Form 1040. But, to file Schedule C, you'll have to qualify first. The conditions to qualify are:
- Your goal is to engage in business activity for income and profit.
- You have continuous and regular business activity.
What's Form 940?
Form 940 is used for reporting your yearly Federal Unemployment Tax Act (FUTA) taxes.
FUTA taxes are collected to fund state unemployment insurance agencies and support unemployed people. FUTA tax is only for employers, and the owner of the sole proprietorship must also pay the tax.
Form 940 is filled out and filed in the first quarter of a tax year and enables the IRS to determine FUTA contributions from a sole proprietorship. To collect or remit FUTA, a sole proprietorship must:
Have paid at least $1,500 in wages in a calendar quarter in the same year or the year before. This means that you as the only employee must have earned this amount.
Have at least one full-time employee, which a sole proprietorship satisfies.
What’s Form 941?
Form 941 is another important document used by a sole proprietorship to report the total payments made to the employee. Since the sole proprietorship owner is the only employee, Form 941 is used to report their payouts. However, Form 941 is essentially a quarterly tax return for the employer.
There are six parts to Form 941, and it is filed four times a year, followed by tax payments. The employer has to specify the quarter in each filing. The four quarters each have three months, starting with January in the first quarter, to December as the last month in the fourth quarter.
In part one of Form 941, you'll find the section to report the number of employees – just one in a sole proprietorship's case – the total earnings and the taxes owed. This section also includes information about the tax amount, if the employer owes taxes or has overpaid.
Part two of Form 941 lists the tax deposit’s schedule for employment taxes. Sole proprietors must deposit either once a month or twice a week, depending on their income. The higher the payment, the more closely packed a deposit schedule. If the taxes are below the $2,500 mark, you only need to pay the tax when you submit the form.
Part three of the form includes bankruptcy information, if it's still paying the employee's wages and if the business is the seasonal employer. Finally, in the last two parts of Form 941, the employer needs to provide specific information about the CPA who can speak with the IRS. You'll also find space to fill in contact information like the name, phone number and a five-digit personal identification number for IRS verification purposes.
For any corrections in Form 941, you need to fill in Form 941-X.
What’s Form 944?
There are some exceptions to filing sole proprietorship taxes. If your annual employment taxes are $1,000 or less for a tax year, you can choose to file your taxes using Form 944.
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