9 Crucial Tax Tips for Sole Proprietor LLCs
If the end of the quarter or April 15th is right around the corner, that means it's time to dig up your cluster of receipts and start figuring out your taxes. Luckily, this process is a lot easier for the sole proprietor LLC owner, as opposed those doing taxes for partnerships or multi-employees LLCs.
Let's take a look at 10 tips, clear some doubts, and get a battle plan for that tax return! This guide was meant for LLC newbies who do their own taxes (without having to hire an accountant).
How Long Have You Owned Your LLC?
9) Know that Your LLC = You
A 1-Person LLC Is Simply Considered to Be A "Sole Proprietorship" to the Government.
The first time you do your taxes, a wave of confusion might hit you: why are there always checkboxes for entities like partnerships and C-class corp's, but none for LLCs? It's because an LLC -- more notably, a 'sole proprietor' LLC with only one owner/employee -- is considered to be nothing more than a plain old sole proprietor.
As far as the government is concerned, you'll be claiming taxes based on any W2's or 1099's you've personally received. Some other things to note:
- The government prefers it if you use your Social Security Number, rather than your EIN. In fact, you won't even need the EIN when doing your taxes, if you're a sole proprietor LLC owner.
- With that being said, your LLC is considered to be "you." If you receive a payment or get a short-term job, it is typically you who puts your name down as the employee name, and the payee name.
- Fill out your tax return as an individual. In fact, having the LLC means nothing when it comes to filling out your taxes -- the only point in registering one is to have that protection of personal assets vs. business assets.
8) You Can Claim Health Insurance
Paying For Your Own Healthcare?
If you're under your own self-employment health insurance premium, you'll get the chance to record the full amount you paid for the year. Part of this premium is deductible, but only if the insurance was established under your LLC.
About Obamacare & Your LLC's Tax Return
If you've signed yourself up through the Affordable Care Act (also called "Obamacare"), you'll have to fill out Form 1095-A: Health Insurance Marketplace Statement, which is mailed to ACA users by January 31st.
This form is the proof of insurance the government requires to prove your standing as a registered healthcare recipient, and you'll need it to complete your tax return! If you don't have Obamacare but are under another qualified plan or that of an employer, you won't have to worry about anything.
Unless everyone in your household has had qualified health insurance all year (12 months total), you'll face a shared responsibility payment.
7) Non-Reported 1099's Can Come Back to Haunt You
Everything You Wanted to Know About 1099's
Schedule C is undoubtedly the main focus of the sole proprietor LLC owner: it reports everything about your business, its structure, earnings and deductions. Since there are no other members in your LLC, you have it easy: you won't have to send W2's or 1099 MISC's out to anyone, nor withhold tax.
Under your Schedule C, you'll have to report the following:
- 1099 MISC forms from any services that paid you money as a non-employee (i.e., affiliates)
- Receipts, which record income your LLC received from providing a service
- Sales, or income your LLC made from selling products
"What if I don't report income from a 1099?"
The third party service that sent you a 1099 MISC will be reporting the income they paid you for your services to the IRS. They *should* have also sent you a copy of this form for your filing.
In turn, the IRS will expect to see a mutual reporting of that income on your tax return. If you fail to report it, you can expect the IRS to contact you back with an "Amount Due" form, stating the total amount you have failed to report and demanding your payment by a very prompt date (1 month from the date that the letter itself was printed). The IRS is very diligent with this -- do not expect a non-reported 1099 to simply slip through the cracks, because it won't!
"What if a service never sent me a 1099?"
Services who have paid you are required to send you a 1099. If they don't, be sure to contact them and request one immediately, if you do not receive it by the mandatory date of January 31st.
"Is it true that I don't have to report income under $600?"
Here's a common misconception: say you made less than $600 with an affiliate program. You've never received a 1099 from this service. Does it mean you don't have to report this amount to the IRS? Take a guess!
The IRS expects you to report all income, regardless of how small it may be. Keep in mind, the service that paid you should have already reported their wages paid, which means you're still expected to report those earnings, even if you didn't receive a 1099.
In cases where you did not receive a 1099, the IRS expects you to make the most accurate estimate about the amount you've been paid for that service. If there is an over or underpayment, you will be notified either way. The point of the matter is that you never know what was reported to the IRS, and it is in your best interest to report all of your earnings and avoid a nasty scenario later down the road.
6) You Have to Claim Bank Insurance, Too
The 1099-INT: Don't Forget Bank Interest Income
It's common sense, but something that is easy to overlook: the final bank statement of the year that you receive from your bank will have all of the info you need to fill out the 1099-INT section of your tax return.
Banks almost never send you a 1099-INT document separately; it's pretty much always tagged on to the December statement. You'll have to claim all of your bank account(s) interest earned.
If you own stock, you'll have to report its interest in a 1099-DIV.
5) Deduct Your (Home) Office Room
Understanding the Infamous "Home Office Deduction"
Many small business owners see a qualified home office deduction as the holy grail of their tax return. It's a nice perk, although, you typically don't get a huge deduction for having one, in most cases.
How to Qualify for a Home Office Deduction as an LLC Sole Proprietor
Qualifying for this deduction depends a lot on the work you do, and how you do it. The IRS is strict on their requirements for what qualifies, and what doesn't. Here are some general rules of thumb:
- Your "home office" is a room that is primarily used for work; specifically, for your primary job. This is known as "regular use."
- Your home office is known as a "principal place of business." Occasional use of your designated home office will mean that you do not qualify. For instance, if you work primarily in an office away from home, it immediately disqualifies your chances of claiming a room in your house as a home office.
- You can claim part of a room as a home office: it needs to be what is known as an "identifiable space" that is apart from the rest of the room. You cannot use this designated part of the room for anything but business.
- Need more info? Check out the official IRS guide about business use of your home.
How Are Home Office Deductions Calculated?
There are two ways to calculate a home office deduction: "actual expenses," or "safe harbor."
- In the "safe harbor" method, you can claim $5 per square foot of your designated home office space, up to a maximum of $1,500.
- In the "actual expenses" method, you'll claim actual expenses like taxes, utilities and mortgage interest ONLY as it pertains to that single room.
- The deductions that come from one or the other method vary on your exact scenario. It might be in your best interest to calculate both methods, and see which of the two give you a bigger return!
4) Create An Accounting Paper Trail
If you're an LLC owner who decided to wear the hat of "accountant," you'll have to start behaving like one. Keep everything in tangible form:
- The best tip ever: most banks give away a free pocketed calendar after New Years. Take one, and use it to store all of your receipts throughout the year for each individual month.
- Keep every receipt for business-only transactions: receipts from gas stations, supply stores, restaurants, hotels or anything else.
- If something isn't in physical form (like an email receipt), then print it and keep the printout.
- If you don't have any kind of receipt from a purchase you made that will be claimed as a business expense, you *can* use its record on a credit card statement as proof. Note that this is usually more difficult to prove in an audit scenario.
3) Claiming Your Car for Business
When It's Legitimate to Claim Your Car
It's true: you can claim your car in an effort to increase your tax refund, even if your car isn't declared to be property of your LLC. Since you most likely use your car throughout the year for business reasons, it's only fair that the government allows you to deduct the expenses directly related to those "business reason" trips. Here's what you'll need to know:
- On New Year's day, it never hurts to take a digital picture of your odometer. You'll have to calculate how many miles you drive per year, and it's often difficult to estimate, since most people don't keep a mental record of how many miles they've traveled in a year.
- In order to start calculating your car deduction, you'll need to report the estimated number of miles you've driven in your car for business only.
- You'll also need to record the estimated number of "commuting miles." Commuting miles are miles driven to and from your place of business, if it is not your home. These commuting miles do NOT count toward the deduction, as they do not qualify.
Two Ways to Calculate Mileage
You'll have the opportunity to either calculate your mileage using "standard mileage" or "actual expenses."
- With "standard mileage," you multiply last year's business-only mileage by the current standard mileage rate (find out what it is, here).
- With "actual expenses," you will itemize numerous expenses, like gasoline, oil changes, tires and other such expenses.
- This is yet another part of your tax return where it would be in your best interest to calculate both methods, and see which of the two result in a higher return for you!
Reporting Your "Out Of Pocket Expenses" For the Car
In this section, you'll be able to report the total dollar amount of the "personal property taxes" you've paid on your car. This is a term that refers to vehicle registration and license fees, or any other vehicle fees that are charged annually. They're usually based on the vehicle's value.
Be Honest, Or Get Snagged
There are a few additional information tidbits that you'll have to record, such as a confirmation that your vehicle is also used for personal (non-business) reasons, and that you have evidence that proves the deductions you've stated. In other words, if you get audited -- you better have all of the proper documentation regarding gas station receipts, oil changes, car registration renewal, or anything else that you claim to be necessary for business reasons.
2) Don't Forget to Pay Quarterly Taxes, Or Else...
Paying Quarterly Taxes As A Sole Proprietor LLC
This is confusing to most LLC owners at first: is it true that you'll have to pay your LLC taxes on a quarterly basis, rather than an annual basis? The answer is that it depends on what forms you're reporting!
- If you will be receiving 1099 MISC's at the end of the year, you will have to report your estimated taxes on a quarterly basis.
- If you're only getting paid via a W2, you will only be filing your taxes before April 15th.
What's the deal with quarterly taxes?
If you're receiving payments that are not withheld (that is, if you're not a W2 employee whose taxes are withheld by your employer), then the IRS expects you to make timely, quarterly estimated payments via form 1040 ES.
The 1040 ES form requires a degree of some down-and-dirty math, where you'll have to follow directions that will eventually combine your expected earnings for the quarter with your expected deductions. The final amount will be the estimated tax you'll pay for the quarter.
At the end of the tax season, you'll still have to file your taxes before April 15th, except you shouldn't have to pay anything in beyond your 4th quarter taxes. Your tax return will state the 4 amounts paid.
What if my earnings are not withheld and I don't pay quarterly taxes?
If you're earning as a 1099 and not a W2 (salaried employee) and you don't pay quarterly taxes, then the IRS will charge you an interest penalty for the amount of time that went by where your payment was expected but not received. Over the course of one year, this can be a large penalty.
1) Claim Business Expenses...The Right Way
A Simple Guide to Claiming Business Expenses
One of the biggest perks of being a small business owner is that you'll be able to claim purchases as business expenses. The main purpose of doing so is to lower your taxable income rate. In some cases, you might be able to bump yourself into a lower tax bracket, resulting in significant savings.
Before you even consider claiming a business expense, be sure of the following:
- The products and services you claim are solely used for business, and nothing else.
- In cases where you can designate a percentage of a product that is used for both business and personal use (such as a new desktop PC), you'll be expected to be truthful.
- In the event that you are audited, your auditor will grill you about every individual purchase and demand explanations for each. It's always best to keep that in mind before you claim anything. If you're doing the right thing, you won't have to worry about issues that might come up in the future.
How do I separate "personal" from "business" when it comes to services I've bought (like cable)?
Things tend to get confusing when you're looking to claim your cell phone as a business expense. Remember, unless your cell phone is used solely for business purposes, it is not considered a valid business purchase in the eyes of the IRS (and its auditors).
So, let's say you have one of those "triple play" cable packages, with cable TV, internet and VoIP phone. Right off the bat, you'll never get away with claiming cable TV as a business expense: don't even consider it. As for the internet service, you'll have to use your own discretion. If it's 100% used for business purposes, then claim it as one. If it's 50% for business purposes and 50% personal use, partition out the cost of internet cable from your "triple play" package, and decrease it by 50%...then claim that amount. Same goes for the land line phone.
What about claiming "gifts" as business expenses?
There are conflict of interest laws about giving gifts in a business setting. The general rule of thumb is that you cannot claim a gift as a business expense unless it can be proven as one, and it must not exceed $25 per recipient.
Claiming anything even remotely related to "personal use"
Simply stated, don't! If you get audited and your auditor does not believe your intentions of claiming goods or services as being true "business expenses," you'll suffer the consequences. While you can simply claim anything you want as a business expense and get away with it, the serious implications happen with that possibility of being audited.
Can I claim LLC renewal fees or even tax software as business expenses?
Claim your annual LLC state registration or renewal fee, your chamber of commerce membership renewal fee, even the tax software you've used to do your own LLC taxes! These are all strictly business-related expenses, and should be recorded as such.