As a sole proprietorship, the government sees both you and your business as being the same entity, so when filing your tax returns you will need to fill out your business’s profits and losses on a Schedule C form and submit it along with your personal income tax form (Form 1040).
When you are an employee, your employer is responsible for withholding the proper amount of estimated taxes for the year. However, when as a sole proprietor you are both the employer and the employee, which means you will be responsible for taking out and holding the proper amount of taxes. and remitting quarterly. To Ensure that you are correctly estimating the amount of taxes you will owe. It is best to work with an experienced accounting firm, to help you correctly estimate the amount due for each quarter.
Along with being responsible for remitting the proper amount of estimated taxes, you will also be responsible for paying “Self-Employment Taxes”. If you worked for an employer, they would pay half of your Social Security and Medicare taxes, however, since you are both than you will be charged 15.3% tax for self-employment, which included 12.4% for Social Security and 2.9% on Medicare based on your annual income.
Even as a sole proprietorship, it is best to invest in an accountant as they will be able to ensure you are correctly estimating how much you will owe quarterly and at the end of the year in taxes, but help find deductions to help you save money. They will also provide expert business advice in ways to grow your business or let you know if and when it is time to incorporate your business.