I recently mentioned to you that in late 2021 I finally officially registered my business. I have worked for myself for years as an independent contractor. However, I decided it was time to do the paperwork to become a sole proprietor. Now that it’s tax time, though, I’ve started to wonder if there’s anything new that I need to know. Will registering my business change my taxes in any way?
Sole Proprietor, No Employees
At this time, nothing has particularly changed about my business since filing the paperwork. The work itself is all still the same. The only thing that changed is the paperwork. For example, I don’t have any employees. While I would love to hire someone eventually, that’s not the stage I’m at right now. So, in terms of what it actually looks like when I’m doing my work day to day, nothing has really changed.
I started researching what I need to know about filing taxes as a sole proprietor. All of the articles I read said that the main thing that’s different between employees and sole proprietors is that the latter must file a schedule C. This explains your profits and losses from your business. Well, I already knew that, because I’ve filed that for well over a decade.
Over the years, what I’ve called myself has changed: freelancer, independent contractor, solopreneur. Well, it turns out that all along, I was self-employed. And, although it wasn’t official on paper that I was the sole proprietor of my business, I was acting as such. In fact, the government recognized it long before I registered the business and got my business banking accounts.
Sole Proprietors File As Themselves
This is the part that I wasn’t sure about. I have always filed personal taxes. I have never filed business taxes. Now that I officially run a business, would I need to file some kind of special business taxes? The answer is no.
In doing my research, I confirmed that sole proprietors file only personal taxes. NOLO explains that the IRS calls this pass-through taxation. The term refers to the fact that all of the business taxes pass through you personally anyway. This is a relief.
Paying Yourself As a Sole Proprietor
One of my biggest concerns about making my business official was that it’s challenging to figure out how to separate business and personal income. I have no challenges with the expenses part, as I’ve been figuring that out for years in order to do my taxes properly. However, I can’t keep the income separate because ultimately it all comes to me to pay both personal and business expenses.
I was afraid that I needed to perform some complicated task of paying myself out of my business accounts. Eventually, I would like to have enough money, and be organized enough, that it works this way. However, that’s not the current reality. And I’m so relieved to know that as far as taxes go, that’s totally okay.
I’m glad to have formally registered my business. However, I’m also glad to learn that this doesn’t change much with my personal tax situation.
Do you file both personal and business taxes? Share your experiences with me in the comments. I’m eager to learn more!
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Kathryn Vercillo is a professional writer who loves to live a balanced life. She appreciates a good work-life balance. She enjoys balance in her relationships and has worked hard to learn how to balance her finances to allow for a balanced life overall. Although she’s only blonde some of the time, she’s always striving for total balance. She’s excited to share what she’s learned with you and to discover more together along the way.