Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Richard Howard55 said:So, does that mean my tax base and local surcharges are just the net difference between what comes in and what goes out?

Pretty much, yeah... unless you've got some carried-over losses from previous years or specific tax credits to write off, then it gets a bit more complicated than that...

stormybadger8 said:Is this actually how it works?

Yeah, it's spot on. 🙂

ruggedlynx63 said:Pretty much, yeah... unless you've got some carried-over losses from previous years or specific tax credits to write off, then it gets a bit more complicated than that...

Exactly! 😁 I’ve got a backup plan ready whenever I'm traveling, 🙂

Richard Howard55 said:Yeah, it's spot on. 🙂

Hold up. Does this mean from now on, all those payroll taxes (Social Security, Medicare, CDC fees, etc.) for independent contractors are being calculated based on their net income? 😵
If so, then the info below isn't right. 😕

Carol Price4 said:Starting January 1, 2016, anyone running their own business—whether they're reporting based on gross income or net profit—is responsible for calculating their own payroll tax and health insurance contributions.

- These folks handle their own math, put together monthly reports—basically their W-2 filings—and send them straight to the IRS
- The payment deadlines haven't shifted, so you'll still need to have those contributions paid up by the 15th of each month for the previous month's work

Here’s how the monthly bases for self-employment insurance contributions look for 2016:

Small business owners (gross income) = $1741 (using a 0.65 multiplier)
Small business owners (net profit) = $2947 (using a 1.1 multiplier)
Freelancers (gross income) = $2947 (using a 1.1 multiplier)

Due to some updates in the regulations regarding how government revenue and mandatory contributions are handled, new specific tax codes for self-employed individuals were added, effective January 1, 2016.

8230 Social Security contribution (Part I)
2330 Social Security contribution (Part II)
8796 Employment tax
8605 payroll tax and health insurance contributions
8133 payroll tax and health insurance contributions

Annual Tax Return

- In Attachment UPO under section 971, we're looking at determining the income tax prepayments for self-employment for the upcoming tax year.
- They also updated the "Long-term Asset List."
- There's a new required form—Form P-PPI—which is basically a summary of all business income and expenses for the year; freelancers have to attach this to their annual return (Form DOH).

- Self-employed taxpayers pay their determined income tax when they file their annual return (which is due by February 29, 2016).
- For those specifically covered under Article 18, once the deadline for filing the 2015 annual return passes, any previous notices regarding income tax prepayments become void.
- Starting in March 2016, monthly prepayments will be calculated based on the numbers from the filed 2015 annual return.
- You'll start paying this monthly prepayment starting March 2016, which is also when you submit your W-2 (funds move from account 1430 to 1619).

- Income tax prepayments are due monthly by the last day of the following month, based on what was reported in the previous year's annual return—essentially, the 2015 tax liability is just split across the months you actually worked.
- If a taxpayer lists other types of income alongside their self-employment earnings on the annual return, the prepayment for the next period is only calculated based on the self-employment portion.
- These monthly prepayments cover the months immediately following the annual return deadline (so for 2016, that means March 2016 through February 2017).

Source: RIPUP, Milivoj Friganović, M.Sc.

Income is just what's left after you subtract expenses from revenue. Why on earth are we now calculating payroll taxes on top of that income? 😕

stormybadger8 said:Hold up. Does this mean from now on, all those payroll taxes (Social Security, Medicare, CDC fees, etc.) for independent contractors are being calculated based on their net income? 😵
If so, then the info below isn't right. 😕

Income is just what's left after you subtract expenses from revenue. Why on earth are we now calculating payroll taxes on top of that income? 😕

Yeah, I guess I agree with you there.

cosmictinker24 said:Yeah, I guess I agree with you there.

Morning! Apis and Devil... are you guys actually trying to give me a heart attack here?!

What kind of "settlement" are we even talking about regarding these pay bumps?

I mean, how is this anything other than the same old average salary with those same annoying corporate multipliers we've always had—except now we're just footing the bill for the bosses' perks ourselves?

The devil is clearly in the fine print of these changes. Man, I seriously hate working in the private sector.

What’s the matter? Everyone panicking? 🤣

Honestly, devilica and apis are spot on—you guys just aren't reading closely enough.

Here is the kicker... 😁

Richard Howard55 said:A colleague was asking me how year-end contributions are calculated. She’s got an office for her licensed engineering practice on top of her regular full-time job. I guess it gets complicated. Maybe.
Carol Price4 explained it all to me. I thought I had everything figured out until yesterday...
Honestly, I’m just completely lost today. Nothing makes sense anymore.

As I understand it, contributions are calculated at year-end based on the difference between total income and expenses. I guess.
Can I find out my totals? And if so, how do I actually pay them? Also... which accounts am I supposed to be using here? 🤔 ),
So, what’s next? How am I supposed to handle this in the KPI? Is this actually following the cash principle, or is it more like an exception—kind of like how we deal with depreciation? I guess I need to know if this gets recorded in the KPI for 2015, even though the filing isn't due until February 28, 2016. Maybe that's the catch.
Fellow accountants, I need some help here. This poor bookkeeper is in a bit of a bind. 😵 🙂

Well, okay, fine 😁
I didn't catch that at all... I honestly thought they’d just come up with some new way to mess with us 😁

hey, can someone help me out? if I paid for something on 11/27/2015, do I need to run depreciation for 12/2015 or can I just wait until 2016?

Henry Edwards33 said:What’s the matter? Everyone panicking? 🤣

Honestly, devilica and apis are spot on—you guys just aren't reading closely enough.

Here is the kicker... 😁

Thanks for clearing that up, Henry... haha, they sure got worked up!

Haha! Talk about tension!!!🙂
It’s pretty disappointing, honestly. You can't even touch the tax base for paid contributions during that first and final year of running a small business. They really nailed the logic on that one, didn't they?

Richard Howard55 said:Haha! Talk about tension!!!🙂
It’s pretty disappointing, honestly. You can't even touch the tax base for paid contributions during that first and final year of running a small business. They really nailed the logic on that one, didn't they?

I totally missed that one—where did you read 🤔

I can't work with just a single word like that. If you want me to rewrite something, I need the actual text first. Throw the original post my way and I'll get to work. kaže:
Hey everyone, quick question for the tax experts here. If I bought an asset on November 27, 2015, am I required to start depreciation in December of that same year, or can I just push it off until 2016?

It doesn't really matter when you actually buy the equipment or when the invoice gets settled. What counts is the date you officially put it into service. That’s entirely up to your discretion, but once you set that start date, that's when depreciation kicks in. 😉

Carol Price4 said:I totally missed that one—where did you read 🤔

This comes as a surprise to me, too. 🤔

Carol Price4 said:I totally missed that one—where did you read 🤔

Nowhere. I didn't read it anywhere, but it just follows from the logic you guys taught me:
1. if I follow the cash basis principle and can reduce contributions on the payment date, that can't possibly happen in the first year of business; it would have to start in the second. In year one, the tax base would be overstated in that scenario.
2. if I'm following the cash basis, then I wouldn't be able to reduce the base on December 31st in the final year either.

The first part seems right. As for the second, maybe I don't have enough pieces of the puzzle—I'm not an expert here:

IRS regulations—Section 31, Paragraph 3—describe what qualifies as business expenses during a business dissolution.
It mentions unpaid obligations (to vendors and other business-related liabilities). The common thread is they were incurred by Dec 31 and remain unpaid.
Contribution calculations might only happen the day after.

If it’s true that I can include those, then the final year includes the value of contributions from the last two years under regular payments. So, if the tax is calculated on a base halved by contributions, it somewhat corrects the consequence from year one. "Somewhat," because there could still be discrepancies when looking at each year individually.
If I can't include the contribution in the final year, then once again, the tax base is overstated.

Which of this is actually correct?
How are contributions for the second year of business paid? Again, only at the end of the year?
How is the tax for the second year of business paid? Only at the end of the year?

Please, just answer these three questions and I'll be eternally grateful! 🙂

You might be overthinking this one 😘

When you wrap up your final year of business, you have to settle every single obligation and outstanding claim. That includes any owner contributions that get finalized on December 31st—just like in the example you gave.

For the very first year, you’re spot on; it really just comes down to cash flow. But that final year always trips me up because you have to square everything away on the very last day of operations. You can't leave anything hanging; it all has to be accounted for.

Henry Edwards33 said:You might be overthinking this one 😘

When you wrap up your final year of business, you have to settle every single obligation and outstanding claim. That includes any owner contributions that get finalized on December 31st—just like in the example you gave.

For the very first year, you’re spot on; it really just comes down to cash flow. But that final year always trips me up because you have to square everything away on the very last day of operations. You can't leave anything hanging; it all has to be accounted for.

Just to add—she was asking about taxes, specifically regarding net income after expenses... in the second year, prepayments kick in once the IRS decision arrives. At least, that's how it's worked for me so far, though I haven't had a chance to dig into the latest tax code changes to see if we need to report those prepayments separately from standard income.🤔

lili p. 🙂
devilgirl 🙂

Yeah, my brain works like a broken desk fan—I end up dizzying myself half the time, though I usually take everyone else down with me too! 😵

Thanks for clearing that up. So, we just keep calculating the contributions ourselves at the end of the year (and they count as expenses when the business closes), but we still need to figure out how those tax prepayments have been handled since the start of 2016 per IRS regulations.

Carol Price4 said:Just to add—she was asking about taxes, specifically regarding net income after expenses... in the second year, prepayments kick in once the IRS decision arrives. At least, that's how it's worked for me so far, though I haven't had a chance to dig into the latest tax code changes to see if we need to report those prepayments separately from standard income.🤔

The updated IRS regulations hit my desk today. I'll take a look and let everyone know if I can make sense of any of this. Thanks again!

I just paid a deposit for a seminar happening in February. When I asked them for a receipt for that down payment, they told me they wouldn't issue anything until I pay the remaining balance on the day of the event. I’m totally lost—how am I supposed to book this expense? They really should be giving me something right now so I can justify the cost, especially since my bank statement clearly shows the money left my account. I don't get it. How are they even going to justify receiving that money on their end?

graniterider10 said:I just paid a deposit for a seminar happening in February. When I asked them for a receipt for that down payment, they told me they wouldn't issue anything until I pay the remaining balance on the day of the event. I’m totally lost—how am I supposed to book this expense? They really should be giving me something right now so I can justify the cost, especially since my bank statement clearly shows the money left my account. I don't get it. How are they even going to justify receiving that money on their end?

Look, they really ought to issue you an invoice for that prepayment if they aren't going to provide the full final invoice before the deadline for filing your sales tax returns for the period you made the payment. Assuming you dropped that money in December, if they don't get the full invoice to you by mid-January, they absolutely should be handing over an invoice for the deposit right now...
If they stay stubborn and refuse, just book it directly from your bank statement under prepaid expenses, and then once you finally get that actual invoice in hand, you can perform the reclassification entry...