Small Business and Sole Proprietor Tax Tips

Small business owners and sole proprietorships frequently – but often unintentionally – run into IRS tax problems because the focus on running the day-to-day operations of the business can cause a business owner to neglect the entity’s tax obligations.  

STLTaxLawyer Mark Milton has a few small business owner tax tips to help ensure a successful and IRS-compliant operation. 

Establish an Entity 

First, Milton recommends establishing an entity for your business not only for credibility but for liability protection and potential tax advantages. Setting up an LLC and registering online with the Secretary of State is an easy and inexpensive process. 

Once the business entity is established, request an Employer Identification Number (EIN) from the IRS, then set up a business bank account using the newly formed entity information to help separate finances. 

A small business owner with a business bank account can always take money out of that account to pay themselves. 

Separate Business and Personal Finances 

“The biggest problem small business owners run into is mixing their personal finances with their business finances,” Milton said. “Commingling finances not only makes it more difficult to accurately depict the financial health of a business through a profit and loss statement, but it will also lead to big reporting problems in the future.”

Small business owners and sole proprietorships that fail to separate finances will have a much more difficult time filing taxes and determining individual income tax obligations. It also is a shortsighted way of running a business since you can only truly measure a business’s financial health by separating personal and business financials.  

Milton also recommends using separate credit cards for business and personal purchases to not only avoid the commingling of expenses but also to benefit from a rewards standpoint. 

Some business credit cards offer incentives and more points back for spending in business-specific categories, such as marketing, whereas those perks are not available or rewarded as significantly if that spending is on a personal credit card.  

QuickBooks Online is a valuable tool to use for linking your business bank and credit cards to track spending easier. 

Remember Your Business Tax Obligations 

If you have a sole proprietorship LLC, you are paid as an independent contractor by your customers for the services provided. The IRS deems those payments as self-employment income requiring you to make quarterly estimated tax payments and pay self-employment tax. Failure to comply could result in substantial penalties, interest, and possibly even criminal prosecution if the government can prove a willful failure to pay taxes.  

The advantage as an independent contractor and sole proprietorship is the greater ability to deduct expenses. A W2 employee is not able to deduct mileage or meals anymore, for example. 

If you are an LLC taxed as a sole proprietorship, you can complete a Schedule C as part of your taxes that enables you to deduct items such as mileage, self-employed health insurance, and a whole host of ordinary and necessary business expenses related to your income. 

Milton Law Group IRS Problem Solvers 

Milton Law Group provides big firm experience with boutique firm service to our small business clients. 

Small business owners are experts in the industry they are operating in, but that does not mean they have the knowledge, planning, and counseling to ensure their business is set up for long-term success, particularly when it comes to potential tax liabilities. 

Contact STLTaxLawyer Mark Milton today so we can learn more about your business and start a discussion about how Milton Law Group can alleviate financial, legal, and tax burdens facing your small business. 

You can also listen to the full “Small Business Tax Tips” segment from “The Mark Milton Show” below.