Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Emily Myers8 said:What's the basis for the IRS to cancel a flat tax assessment?
How can someone be registered for sales tax if they were paying under the flat tax system?
The tax might stay the same as last year or even go up depending on the previous year's revenue, so that determined tax gets paid once they meet the requirements to register with the RNC.
Just a heads up, 1430 and 1619 aren't the same thing; prepayments toward the tax are made to 1430 until the annual return is filed.

To put it simply, it's because their total deliveries exceeded $100 and they received an official notice from the RNC.

Emily Myers8 said:What's the basis for the IRS to cancel a flat tax assessment?
How can someone be registered for sales tax if they were paying under the flat tax system?
The tax might stay the same as last year or even go up depending on the previous year's revenue, so that determined tax gets paid once they meet the requirements to register with the RNC.
Just a heads up, 1430 and 1619 aren't the same thing; prepayments toward the tax are made to 1430 until the annual return is filed.

Like I mentioned before, while they were operating under the flat rate, they pay that specific amount, but starting from the first of the month they begin keeping formal business books, they switch to paying standard self-employment income tax... I really don't think I need to keep repeating myself here.

Believe it or not, there are actually scenarios where you can be part of the sales tax system while still being a small business owner on a simplified tax plan... In this particular case, that isn't what's happening, but I really want to convey just how incredibly complex this whole legal landscape can get, which makes our colleague's situation one of the most straightforward ones out there... Any other accountant or tax advisor you talk to will tell you exactly what I'm saying is correct...

Nathan Kim5 said:To put it simply, it's because their total deliveries exceeded $100 and they received an official notice from the RNC.

Like I mentioned before, while they were operating under the flat rate, they pay that specific amount, but starting from the first of the month they begin keeping formal business books, they switch to paying standard self-employment income tax... I really don't think I need to keep repeating myself here.

Believe it or not, there are actually scenarios where you can be part of the sales tax system while still being a small business owner on a simplified tax plan... In this particular case, that isn't what's happening, but I really want to convey just how incredibly complex this whole legal landscape can get, which makes our colleague's situation one of the most straightforward ones out there... Any other accountant or tax advisor you talk to will tell you exactly what I'm saying is correct...

From what I get, you just notify the IRS or your agent via message or call once revenue hits $100000. If the IRS already issued a ruling for flat taxation, does that ruling need to be canceled? I already asked this, but I'll ask again—if it needs canceling, is there a specific process? If so, the basis would be filing an SD for the period when they still qualified for the flat tax. Anything over 300,000.00 counts as taxable income from the moment they started keeping books, and any expenses tied to that income are deductible.
In my experience, the IRS doesn't care if you know your rights, hire a pro to manage your business, or just wait until the end of the year and claim you didn't know or were misinformed without proof.
At the end of the day, taxpayers are expected to know the rules, or they're just looking at a fine.

Quincy:

Believe it or not, there are actually scenarios where you can be in the sales tax system and still be a small flat-tax business at the same time.

Obviously, there are different ways to handle sales tax versus those who aren't even required to collect it.
Usually, a solo entrepreneur isn't aware of these obligations, so they end up getting hit with a penalty and a massive bill they never planned for.

Quincy:

It’s not the case here, obviously, but I'm trying to show how insanely complex these laws are. This user's situation is actually one of the simplest ones out there. Any other accountant or tax advisor will tell you exactly what I'm saying.

The bookkeeper here can confirm it, and the IRS will back me up too. Just post the response from the IRS right here.

Yeah, once you cross $100 you’re actually required to notify the IRS and the RNC, then file the appropriate registration form to join the sales tax system. From the very first day of the following month, you have to start maintaining formal business books and issuing invoices that include sales tax. If you hit that threshold on the very last day of the previous month, there's a good chance the IRS won't have processed your RNC paperwork by the time the new month rolls around, but you're still legally obligated to start bookkeeping and charging tax regardless of whether you've received your official approval yet...

Emily Myers8 said:From what I get, you just notify the IRS or your agent via message or call once revenue hits $100000. If the IRS already issued a ruling for flat taxation, does that ruling need to be canceled? I already asked this, but I'll ask again—if it needs canceling, is there a specific process? If so, the basis would be filing an SD for the period when they still qualified for the flat tax. Anything over 300,000.00 counts as taxable income from the moment they started keeping books, and any expenses tied to that income are deductible.
In my experience, the IRS doesn't care if you know your rights, hire a pro to manage your business, or just wait until the end of the year and claim you didn't know or were misinformed without proof.
At the end of the day, taxpayers are expected to know the rules, or they're just looking at a fine.

Quincy:

Believe it or not, there are actually scenarios where you can be in the sales tax system and still be a small flat-tax business at the same time.

Obviously, there are different ways to handle sales tax versus those who aren't even required to collect it.
Usually, a solo entrepreneur isn't aware of these obligations, so they end up getting hit with a penalty and a massive bill they never planned for.

Quincy:

It’s not the case here, obviously, but I'm trying to show how insanely complex these laws are. This user's situation is actually one of the simplest ones out there. Any other accountant or tax advisor will tell you exactly what I'm saying.

The bookkeeper here can confirm it, and the IRS will back me up too. Just post the response from the IRS right here.

If what you're implying is that a small business owner who enters the sales tax system mid-year doesn't need to file their SD form until January 15th of the next year, then I can guarantee the local Police Department won't be agreeing with you at all. Honestly, maybe the folks at our local branch are just losing their minds, because they've been demanding we submit those forms for years, processing them regularly, and assessing our taxes based specifically on those filings...

Hey, quick question—for invoices I sent out back in 2022, but didn't actually get paid until sometime in 2023... which year does the IRS count that as income?

Thanks.

redmason4 said:Hey, quick question—for invoices I sent out back in 2022, but didn't actually get paid until sometime in 2023... which year does the IRS count that as income?

Thanks.

Income counts when you actually get the cash, and expenses work the same way.

It really just depends on whether you're an entrepreneur filing based on payments received (the old R2 style) or on invoices issued (R1)...

It could go either way, depending on which category you fall into...

A small business owner making a profit can choose how they handle their fees, which counts as income—just like in this example, where it's based on those collected fees.

Emily Myers8 said:A small business owner making a profit can choose how they handle their fees, which counts as income—just like in this example, where it's based on those collected fees.

How did you even decide this was a sole proprietorship, let alone figure out their net profit or what their 2022 revenue looked like? 🤔

The thread title is fine, I guess, but people just spout random stuff in every single discussion...
So, there's no way to know if that answer is actually right, considering you have zero data on their actual turnover...

stormybadger8 said:How did you even decide this was a sole proprietorship, let alone figure out their net profit or what their 2022 revenue looked like? 🤔

The thread title is fine, I guess, but people just spout random stuff in every single discussion...
So, there's no way to know if that answer is actually right, considering you have zero data on their actual turnover...

I try to keep track of who asks what.
This question was posted back on April 14, 2022.

redmason4 said:Hey everyone, I could really use a little help if anyone has a sec 😵 just to see if my math actually adds up 😬

So, I run my own thing as a sole proprietor here in the States, and I’m about to hit that $250,000 threshold

Here’s the scenario I'm looking at:
Let's say my total annual revenue hits $133, which means I've officially blown past the $100 mark.

Based on how I'm seeing it:

- I'll have to register for sales tax and pay monthly or quarterly—is that basically just an advance on my year-end tax bill or what?
- Since my work falls under that "artistic services" category, I get a 25% deduction... so if we're talking $400,000, taking off 25% leaves me with $100
- Then, on top of that $250,000 baseline, I've got all my business expenses—let's say $3.25 in deductible input receipts
- That leaves $97, and since my total gross was over $360,000, am I stuck with a 36% tax rate?

So, if the annual tax is 36% of $290,000, that would mean $35...?

Am I tracking this correctly, or is there some other crazy tax rule I totally missed...

Thanks 😍

And here is my answer to those questions.

😁🙏🙏🙏

I’ll let you guys know once I actually get my hands on the statement—once I see if the numbers are even remotely close to what I was expecting...

Hey, I was hoping someone could point me in the right direction. So, I think I messed up my tax return filings for 2021—specifically, I left one child off the list of dependents. Is there any way to go back and fix that now? It’s a pretty big deal because the mistake ended up making my tax bill way higher than it actually should be...
Thanks 🙂

Hey everyone.

So, regarding those invoices issued back in December 2022 where the payment isn't actually due until January 2023... they were logged in the IRS for 2022, but then the software automatically pushed them into 2023 and converted everything into dollars. How on earth am I supposed to close out those specific accounts? It’s saying services performed in 12/22 have to be closed out in USD?

cosmictinker24 said:Hey everyone.

So, regarding those invoices issued back in December 2022 where the payment isn't actually due until January 2023... they were logged in the IRS for 2022, but then the software automatically pushed them into 2023 and converted everything into dollars. How on earth am I supposed to close out those specific accounts? It’s saying services performed in 12/22 have to be closed out in USD?

Is anyone even there ????🤔

cosmictinker24 said:Hey everyone.

So, regarding those invoices issued back in December 2022 where the payment isn't actually due until January 2023... they were logged in the IRS for 2022, but then the software automatically pushed them into 2023 and converted everything into dollars. How on earth am I supposed to close out those specific accounts? It’s saying services performed in 12/22 have to be closed out in USD?

If you're running a sole proprietorship, any unpaid outgoing invoices aren't considered actual income yet, so you don't report them to the IRS for sales tax purposes.

Quincy:

How do I close out those accounts? It says services completed in Dec '22 need to be closed in dollars?

What you're seeing doesn't apply to sole proprietors; that's more for corporations paying corporate tax.
An outgoing invoice counts as revenue regardless of whether you've been paid, so it goes into the current fiscal year in dollars, while the outstanding balance gets carried over to the next year in dollars.

Emily Myers8 said:If you're running a sole proprietorship, any unpaid outgoing invoices aren't considered actual income yet, so you don't report them to the IRS for sales tax purposes.

Quincy:

How do I close out those accounts? It says services completed in Dec '22 need to be closed in dollars?

What you're seeing doesn't apply to sole proprietors; that's more for corporations paying corporate tax.
An outgoing invoice counts as revenue regardless of whether you've been paid, so it goes into the current fiscal year in dollars, while the outstanding balance gets carried over to the next year in dollars.

So, we’re looking at this Synesis software again. Their instructions say to log every single unpaid bill from 2022 into the IRU and URU, regardless of when they were actually due. I guess if you enter them that way, the system just shuffles them over to 2023, but then everything shows up in dollars. Then there's the part about the 2023 bills—apparently, you can record those in Q1 using dollars because the sales tax for that period has to be in dollars too. But wait, what happens with the invoices issued in Q1 that were already paid in dollars right away? It’s all a bit messy. If I follow this, I’ll end up with a closed set of books where some accounts are settled in dollars and others in something else entirely. It’s confusing, honestly.

cosmictinker24 said:So, we’re looking at this Synesis software again. Their instructions say to log every single unpaid bill from 2022 into the IRU and URU, regardless of when they were actually due. I guess if you enter them that way, the system just shuffles them over to 2023, but then everything shows up in dollars. Then there's the part about the 2023 bills—apparently, you can record those in Q1 using dollars because the sales tax for that period has to be in dollars too. But wait, what happens with the invoices issued in Q1 that were already paid in dollars right away? It’s all a bit messy. If I follow this, I’ll end up with a closed set of books where some accounts are settled in dollars and others in something else entirely. It’s confusing, honestly.

Just ignore those instructions. It’s totally different for a sole proprietor reporting income versus a corporation issuing service fees or whatever.
Sales tax for Q1 '23 on stuff from late 2022 was handled in the old currency, but everything after that is strictly USD.
Any invoice entered from January 1st, 2023, onwards is in USD—no exceptions.

What kind of trouble is my friend looking at if an IRS auditor shows up? He runs a sole proprietorship and isn't registered for sales tax.
He does boat rentals and IT work (last year he cleared $100000 just from the IT side), but they ended up refunding $20,000 to a German client, claiming it was a mistake. (I have no clue how his accounting firm handles those kinds of corrections, but whatever—they just opened some LLC where the German guy will presumably pay that $20,000 again in 2023.

The boat rentals get booked through international agencies, local outfits, and hotels.

But his accountant is booking everything based on bank statements like this:
Money arrives via PayPal, so she issues the invoice to PayPal without a tax ID, or to Airbnb Payments, which is really just a financial intermediary used to move the cash.

She’s insisting I’m wrong and she’s right, but my take is that the invoice should be issued to the actual person who rented the boat, regardless of the fact that the money flowed through these financial institutions. I also don't get how she can book the gross amount when, say, Airbnb takes a processing fee—like 3% plus tax—and then issue an invoice for that. Is he even required to file sales tax returns under this setup?

What do you guys think? Am I losing my mind here, or is the accounting firm actually in the wrong?

wearytrucker22 said:What kind of trouble is my friend looking at if an IRS auditor shows up? He runs a sole proprietorship and isn't registered for sales tax.
He does boat rentals and IT work (last year he cleared $100000 just from the IT side), but they ended up refunding $20,000 to a German client, claiming it was a mistake. (I have no clue how his accounting firm handles those kinds of corrections, but whatever—they just opened some LLC where the German guy will presumably pay that $20,000 again in 2023.

The boat rentals get booked through international agencies, local outfits, and hotels.

But his accountant is booking everything based on bank statements like this:
Money arrives via PayPal, so she issues the invoice to PayPal without a tax ID, or to Airbnb Payments, which is really just a financial intermediary used to move the cash.

She’s insisting I’m wrong and she’s right, but my take is that the invoice should be issued to the actual person who rented the boat, regardless of the fact that the money flowed through these financial institutions. I also don't get how she can book the gross amount when, say, Airbnb takes a processing fee—like 3% plus tax—and then issue an invoice for that. Is he even required to file sales tax returns under this setup?

What do you guys think? Am I losing my mind here, or is the accounting firm actually in the wrong?

If you're a sole proprietor, your total sales can't go over the threshold to be required to collect sales tax.
Just because money hit the account doesn't mean it counts as a sale; the ledger is what actually determines what constitutes revenue.
If he issued a refund to a customer, that buyer doesn't get a tax deduction for that amount—so is that even a good deal for them?
On what basis would that customer pay such a massive amount like $20,000.00 to a new LLC?

Quincy:

The boat rentals are booked through international agencies, local outfits, and hotels. But his accountant records everything based on bank statements, like money comes in via PayPal, so she issues the invoice to PayPal without a tax ID, or to Airbnb Payments, which is really just the financial middleman handling the cash.

An invoice is for the customer; banks or other organizations won't just write off their own costs or fees based on an invoice you issued.

Quincy:

She claims I'm wrong and she's right, but I'm telling her the invoice needs to be in the name of the actual person who rented the boat, even if the funds passed through those financial institutions.

Obviously, it should be in the customer's name.

Quincy:

I still don't get how she books the gross amount when, say, Airbnb takes a processing fee of 3% plus tax. Does he have to file sales tax returns for that?

For a sole proprietor, that's not really a factor; it's the incoming revenue that matters.
Once he switches to an LLC, then that becomes a deductible expense.

Quincy:

Who do you think is right, me or the accounting firm?

You are, for issuing the invoices. 👍

If my sole proprietorship was forced into the VAT system by law last year—meaning I submitted the required forms and had all my paperwork perfectly in order—shouldn't I have received a final tax assessment or a statement regarding last year's total tax amount by now? Or is this something where the business owner is expected to just crunch the numbers themselves and send the payment over manually?

I mean, I am seeing those quarterly prepayments for the current year arriving quite regularly...