Sole proprietors of a business are in charge and as such face certain taxes and benefits that they should be aware of. There are deductions that they may be eligible for. As far as the tax code and the IRS is concerned, you and your business are a single entity. Sole proprietor means that you have the ultimate flexibility with your business, but it also makes you responsible for additional taxes and reporting requirements. Therefore, as a sole proprietor it pays to be aware of any deductions you may be eligible for. Here are some to watch for.
As a sole proprietor you can be eligible to deduct the cost of health insurance for yourself, your spouse and any dependents. The health insurance deduction can be taken even if you don’t itemize deductions on your tax return. The health insurance deduction is taken off your gross income before you reach your adjusted gross income which makes it an “above the line”.
For a self-employed person, the responsibility for self-employment taxes and regular income taxes falls on the individual. Self-employment taxes are basically for Social Security and Medicare which would normally be paid by your employer. Sole proprietors are taxed as employer and employee, so you end up paying both taxes. If there’s any good new it’s that you can deduct half of the self-employment taxes.
Keeping detailed records are important, especially as a sole proprietor. The IRS is aware that as a sole proprietor it is easy claim something as a business expense that rally wasn’t used for the business and if you are audited, they’ll want to see proof. Your business and personal taxes may be combined, but if you itemize and take business deductions, the IRS may want to see records proving that the item in question was used for the business.
Taxes can be confusing and if you are still not sure about your tax position as a sole proprietor, see a tax professional and find out for sure.