Sole Proprietors: File Your Taxes With Confidence

Prepare for tax season with five tips to help sole proprietors get the job done right.

By Navy Federal December 20, 2018
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One of the costs of doing business is paying business taxes. As a sole proprietor, you’re likely required to file a tax return by April 17, which is the same deadline for individuals this year. If this is your first time filing business taxes, you’ll need to get acquainted with some new tax forms (see table). The following tips can help you avoid tax blunders sometimes made by sole proprietors.1

  1. Pay estimated taxes quarterly.

    Tax time isn’t just once a year for businesses; you must pay estimated taxes each quarter.1 As a sole proprietor, you should use Form 1040-ES to figure and pay your estimated tax. If you don’t pay enough through estimated tax payments, you may be charged a penalty. Even if you’re due a refund when you file your tax return, you may be charged a penalty if you don’t pay enough by the due date of each payment period.

  2. Report all your business income.

    If you receive income that’s connected to your business, it’s considered business income. Business income usually takes the form of cash, checks and credit card charges. However, it can take other forms, too, such as property or services. In those cases, you must report the fair market value of the property or services you received. For example, if your catering service is hired by a local farmer who pays you with 10 dozen eggs a week for a year, you must report the value of the eggs. The IRS compares the information reported by banks, businesses and other payers with the income you report on your income tax return. If the IRS believes you have underreported income, it will send you a notice with proposed changes to your tax. You may owe interest and/or a penalty.

  3. Choose a method for taking the home office deduction, if you qualify.

    If you use part of your home exclusively for business on a regular basis, you may be able to deduct expenses for the business use of your home. There are two methods:

    • Regular method: Calculate the actual expenses for your home office based on the percentage of your home devoted to business use.
    • Simplified method: Deduct $5 per square foot of your home used for business, up to 300 square feet.
  4. Take the proper deduction for business gifts.

    You can deduct all or part of the cost of gifts given in the course of your trade or business, but only up to $25 per person. So if you give $25 gifts to 10 people, you can deduct $250. If you give $50 gifts to 10 people, you can still only deduct $250 (the first $25 of each individual gift).

  5. Deduct all your business expenses.

    According to the IRS, to be deductible, a business expense must be both ordinary and necessary. You should track all your expenses, large and small, throughout the year rather than try to gather a year’s worth of receipts when the tax deadline rolls around. See Publication 535 for more about deducting business expenses.

After a sweeping overhaul of the U.S. tax code in 2017, it’s essential to review your tax situation for potential changes and new opportunities to reduce your tax burden. For help with tax-saving strategies for small businesses, consult with a qualified tax professional.


If you’re liable for... Use Form:
Income tax 1040 and Schedule C or C-EZ
Self-employment tax Schedule SE
Estimated tax 1040-ES
Social Security and Medicare taxes and income tax withholding 941 or 944, W-2 (to employee)
Providing information on Social Security and Medicare taxes and income tax withholding W-2 and W-3 (to the Social Security Administration)
Federal unemployment (FUTA) tax 940

1Certain exceptions apply. See your tax advisor for details.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.