What is a sole proprietorship?
Sole proprietors have the simplest business structure. If you start a business and do not incorporate it, you are a sole proprietor. The IRS views you and your business as one and the same.
How are sole proprietorships taxed?
As a sole proprietor, you are taxed as an individual. You report all income and expenses on your personal tax return (Form 1040). The only difference between filing as an individual and filing as a sole proprietor is that you must complete a Schedule C with your Form 1040.
As a sole proprietor, your income will be taxed for both income and self-employment taxes. Your business income is subject to an additional self-employment tax.
What information do I need to fill out a Schedule C?
Sole proprietors will need to have the following information to complete the Schedule C:
- IRS instructions
- Social Security Number
- Employer Identification Number
- Financial statements, specifically income statements, show earnings and expenses.
- Records and receipts for planned tax write-offs
- Mileage records, if you plan to take business vehicle deductions
How do I fill out the Schedule C?
There are five distinct parts that need to be filled out to complete your Schedule C, of which four relate to your private practice:
- Income is where you report all of your practice earnings for the year. This can be found on your financial statements.
- Expenses is where you include all of your practice expenses for the year. This can be found on your financial statements.
- Information on your vehicle is for sole proprietors who want to account for the Business Use of Vehicle deduction.
- Other expenses are for any other expenses that you would like to report that you couldn’t find a location for in the above sections, namely the expenses section.
As a private practice owner, you are selling your services and not physical goods, and as such, you do not maintain inventory on hand. This means you do not need to complete the Cost of Goods Sold section.
Do I need to file more than one Schedule C?
If you run multiple, non-related businesses, then you need to complete a separate Schedule C. Be sure to talk to your accountant or the Heard team if you have separate, distinct forms of income.
Can I deduct self-employment taxes?
You can deduct 50% of your self-employment taxes. This is not a business deduction on Schedule C, but one that is accounted for as an Adjustment to Income on Schedule 1.
I am a single-member LLC. Do I file as a sole proprietor?
In short, yes. Unless you are a single-member LLC that has opted into filing as an S corporation, you will be taxed just like a sole proprietor. However, if you have multiple owners in the LLC, you will be taxed as a partnership and will need to complete Schedule K-1.
Do I qualify for the Qualified Business Income deduction?
Yes, as a mental health professional, you are considered a “Specified Service Business,” which means that you are limited in your ability to take the full amount of the deduction.
What are estimated tax payments?
If you are self-employed and will owe more than $1,000 in taxes, you are required to pay your taxes four times a year in estimated payments. This estimated tax payment is calculated based on assumptions about income tax, self-employment tax, and any other tax you might be subject to as a practice owner. To learn more, please see the following: What are quarterly tax estimates? and How does Heard calculate quarterly estimated taxes?
Who needs to make estimated payments?
If you are a sole proprietor, S corporation, or self-employed mental health professional, you will need to make quarterly estimated payments when you are expected to owe $1,000 or more in taxes.
When are estimated tax payments due?
You must pay quarterly tax payments on the dates below for the associated business periods:
- For January 1st through March 31st; April 15th
- For April 1st through May 31st; June 15th
- For the period June 1st to August 31st; September 15th
- For the period September 1st to December 31st, January 15th of the following year
Where do I make estimated tax payments?
You can pay estimated taxes online or by phone via the IRS Payments Gateway. For corporations, you must file through the Electronic Federal Tax Payment System.
IRA Contributions
For SEP IRA contributions, as a self-employed individual, the SEP deduction is calculated based on your "net" self-employment earnings. There is a separate IRA worksheet to help you calculate. For Traditional IRA contributions, you can deduct up to $6,000 ($7,000 if you are age 50 or older), but if you have high enough income, that may not be deductible.
Similar to the Student Loan Payment, there is a phase out. If you are married, filing jointly and making less than $196,000, you can deduct the whole amount. If you are making $196,000 to $206,000, there is a partial phase out. If you are making above $206,000, you cannot deduct any amount.