Is a Sole Proprietorship Considered Self-Employed?
If you own and operate a business, or if you are thinking about starting a business in the near future, you may be wondering how you should plan to file your business entity. You have many choices, including filing as an LLC, a corporation or a sole proprietorship. A sole proprietorship may sound like a fancy legal term, but it's really no different than being self-employed.
Other People Are Reading
-
Sole Proprietorship Definition
-
According to the IRS, a sole proprietor is an individual who owns an unincorporated business as the sole owner with no other parties involved. You are considered a sole proprietorship if you run your own business as an independent contractor or LLC. Typically, a sole proprietorship offers no legal distinction between the sole proprietor owner and the business. Although a sole proprietor may conduct business under a unique business trade name, all profits and debts belong to the owner without legal separation between the individual and the business.
LLCs
-
If you operate a single-member LLC, or limited liability company, you are generally considered to be a sole proprietor and therefore self-employed in most cases. IRS.gov indicates that certain exclusions may apply to some LLC owners. An individual who is the sole member of a domestic limited company may not be considered a sole proprietor if he chooses to treat the limited liability company as a corporation by filing separate corporate tax forms.
-
Self-Employment Tax
-
When you are self-employed as a sole proprietor, you are responsible for paying self-employment tax sometimes referred to as SE tax. Self-employment taxes include payments to social security and Medicare. As a wage earner working for an employer, these taxes are withheld from your paycheck. If you perform work for other individuals or businesses and receive a 1099 income statement, or if you work for yourself as a sole proprietor or independent LLC owner, you are required to pay taxes on your earnings.
Tax Forms
-
If you worked for a company as an employee, your total income and tax deductions would typically be reported to the IRS through a W-2 form. As a sole proprietor who is self-employed or the single owner of an LLC, Toolkit.com indicates you must report your total annual income on schedule C and submit it with your 1040 tax return.
Tax Benefits
-
According to BusinessKnowHow.com, you have several tax advantages as a sole proprietor. Not only can you write off the cost of materials and equipment used in your business, but you can also deduct part of your home expenses if you work out of an office in your home. You may also qualify for a self-employment tax deduction if you pay for health insurance and valid medical expenses.
-
References
- Photo Credit A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com
