Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Am I asking the wrong questions here? I mean, surely I can't just claim everything as income, otherwise, I wouldn't be paying any taxes at all, would I?!

David Mitchell4 said:Am I asking the wrong questions here? I mean, surely I can't just claim everything as income, otherwise, I wouldn't be paying any taxes at all, would I?!

Look, here is how it works: you record your receipts and you record your expenses, and at the end of the year, that difference is your taxable income. You pay tax on that specific amount. As for the cash itself—you can pull whatever money you want out of your account throughout the year; the balance sitting in your bank account isn't considered income. Withdraw what you need for yourself, 😁

placidlynx92 said:Look, here is how it works: you record your receipts and you record your expenses, and at the end of the year, that difference is your taxable income. You pay tax on that specific amount. As for the cash itself—you can pull whatever money you want out of your account throughout the year; the balance sitting in your bank account isn't considered income. Withdraw what you need for yourself, 😁

Spot on, you nailed it. I think most people just get confused between a sole proprietorship and an LLC. With a sole proprietor setup, you can spend your profit however you want without giving anyone an explanation, provided you've covered your bases—including those taxes that can climb all the way up to 40%, whereas with an LLC, you're looking closer to 20%. The kicker, though, is that a sole proprietor is personally on the hook for every cent of business debt with everything they own, while an LLC gives you that shield so your personal assets stay safe.

Nathan Peterson10 said:Thanks for the answer.👍

I was wondering what happens if I pay the payroll taxes and everything else on Friday afternoon?
Can I submit the electronic tax filing with Monday's date via the IRS portal, or am I forced to file by Saturday?

As for these new changes regarding income, taxes, and contributions—it’s honestly terrible.
It’s driving me crazy. I don't understand who would pass such senseless laws and regulations, creating all this confusion and unnecessary hassle.
Why make things so complicated?

When you're doing an electronic transfer for taxes, you need that specific filing ID, which you won't actually have until after you've submitted the paperwork. So, you've gotta send the tax report first, then make sure you hit that payment on the same day using the right reference number.

No, actually, you all completely missed my point.

Mars, don't even sweat it—just keep pulling cash out of your business account for whatever personal stuff you need. You can always just settle up the taxes at the end of the year by paying the difference between what you brought in and what you spent.

amberbadger17 said:I just sent off my tax return and the Form 1040. Everything went through smoothly, thankfully.

On a side note, I’m about 100 pounds lighter now. Life is good.

Anyway, I could use some quick advice regarding Schedule C:

Under "other non-taxable income," I included two transfers to my savings account that were actually related to a deposit from back in 2014, even though the money hit the account in 2015. Do I need to attach bank statements? They just say "cash deposit" since I did it at an ATM, so they aren't super descriptive. Or is it enough to just list the amount without any extra paperwork or explanations?

Thanks!

.

Who?

amberbadger17 said:Mars, don't even sweat it—just keep pulling cash out of your business account for whatever personal stuff you need. You can always just settle up the taxes at the end of the year by paying the difference between what you brought in and what you spent.

But wait, am I supposed to pay taxes on that too?
Following your logic, if I just leave $0.33 sitting in my account, I'd be taxed on that as well.

David Mitchell4 said:But wait, am I supposed to pay taxes on that too?
Following your logic, if I just leave $0.33 sitting in my account, I'd be taxed on that as well.

I honestly don't get what you're asking... Look, if you invoice a client for $3333, but you owe your supplier $1000, you're just handing over that $2,400 in sales tax to the IRS once the client settles up. After all that, you've got $1533 left over; you'll owe income tax on those $1533, but whatever else is left is yours to do with as you please—you don't have to justify your spending habits to anyone. Sure, you can pull cash out whenever, but most people just leave enough in the business account to keep the lights on.
The IRS doesn't care about your daily bank balance; they aren't taxing you based on what shows up in your checking account right now, they're looking at what your books say you actually owe them.

amberbadger17 said:.

Who?

If I were you, I’d just leave the total amount on there, and if those guys really want to get nosy, they can ask for the paperwork later. It's not like they don't already know exactly how much cash hit your bank account, and if that doesn't line up perfectly with what you put on your tax returns, then you'll just have to sit them down and explain the discrepancy—God forbid you actually had a little extra land in your account instead of just recording it in the books...

You clearly missed my point. I was asking about the specific amount you can claim as a tax-free standard deduction—that baseline portion of income that isn't subject to taxation. As it stands, you're implying that everything else just gets hit with taxes. Of course I can spend that money however I please once the IRS has taken its cut. 🙄

David Mitchell4 said:You clearly missed my point. I was asking about the specific amount you can claim as a tax-free standard deduction—that baseline portion of income that isn't subject to taxation. As it stands, you're implying that everything else just gets hit with taxes. Of course I can spend that money however I please once the IRS has taken its cut. 🙄

Yeah, looks like we’re finally on the same page... A small business owner in the States pays income tax pretty much the same way any regular W-2 employee does. If I pull in 20 $0.00, I'm looking at a 40% tax bill, with the only real difference being that I'm paying payroll taxes based on a salary of $1167.

What does a 12% tax rate actually break down to?

David Mitchell4 said:What does a 12% tax rate actually break down to?

So, looking at federal income tax brackets... up to $8800, then you're hitting 25% on anything from 26,400 to $52800, and once you cross 158,400, it jumps to 40% and keeps climbing from there..

Jessica Gonzalez30 said:From what I understand, you only report interest if it's tied to funds being used specifically for business operations—and even then, only if the tax hasn't already been withheld at the source, like interest on a standard checking account for overnight deposits.

Since the bank would have already withheld the tax when they paid out the interest (effectively reducing the payout by that amount), I'm leaning toward thinking this interest shouldn't be included, especially if it isn't interest attributed to capital deployed for actual business activities.

If I've got that wrong, please feel free to set me straight.
I'm just getting a bit lost wading through all this law and regulation 😵

Ugh, I don't even know anymore... apparently, it's just his personal savings!
And then the bank goes and writes this letter telling him to just include it on his annual tax return...🤔
It’s the same story as before; we tried providing the documentation from ASCAP regarding the royalties he received, but the IRS didn't give a damn... they wouldn't even factor that income into his self-employment earnings!!!

David Mitchell4 said:But wait, am I supposed to pay taxes on that too?
Following your logic, if I just leave $0.33 sitting in my account, I'd be taxed on that as well.

Well, you pay taxes on what you officially have "on paper"—if you catch my drift. At the end of the year, my actual income—which is basically just the difference between what came in and what went out—might show up as $X, even though in reality, I don't actually have that much sitting in my bank account or tucked away in my wallet. I don't pay taxes on the leftover balance in my checking account, nor on the money I already paid out as prepayments or withdrew to cover business expenses; I only pay on that final surplus shown on my income and expense summary. That specific number is my actual income, and once I divide that by twelve, there's your monthly net pay. It honestly happens to me sometimes where I end up paying out more in prepayments during the year than what my actual net monthly salary turns out to be at the end of the day...

So, I’m sitting here grinding through this application I downloaded straight from IBM, and I was wondering if anyone else has actually tried filing through their system before?
I'm losing my mind over here—4.2.8. is totally glitching out on me! It won't let me type anything into the "Base Amount for Contribution Calculation" field?? It’s literally locked!

Keith Martinez5 said:Well, you pay taxes on what you officially have "on paper"—if you catch my drift. At the end of the year, my actual income—which is basically just the difference between what came in and what went out—might show up as $X, even though in reality, I don't actually have that much sitting in my bank account or tucked away in my wallet. I don't pay taxes on the leftover balance in my checking account, nor on the money I already paid out as prepayments or withdrew to cover business expenses; I only pay on that final surplus shown on my income and expense summary. That specific number is my actual income, and once I divide that by twelve, there's your monthly net pay. It honestly happens to me sometimes where I end up paying out more in prepayments during the year than what my actual net monthly salary turns out to be at the end of the day...

I get it. You spend from the account however you please, then pray at the end of the year that you can justify most of it.

Personally, I don't find that to be a very reliable strategy. It's far too easy to end up with a pile of unjustified expenses, and a 25 or 40 percent tax rate is simply too high for a small business owner to swallow.

Did the rates for calculating professional membership fees change for 2015—and if so, what are the new numbers? Specifically, I’m looking at Group A III and Group I... I actually ended my subscription with IBM because their info regarding small businesses was just too thin for what I actually need, but now I'm feeling a bit lost without a reliable source to check everything. Also, if anyone could point me toward some better publications—something that really focuses on the niche industries relevant to small business owners—I would truly appreciate it! Thanks so much

David Mitchell4 said:I get it. You spend from the account however you please, then pray at the end of the year that you can justify most of it.

Personally, I don't find that to be a very reliable strategy. It's far too easy to end up with a pile of unjustified expenses, and a 25 or 40 percent tax rate is simply too high for a small business owner to swallow.

Look, it isn’t about whether a small business owner is physically spending money directly from their business account. They’re simply hoping they can justify whatever they can possibly pass off as a deductible expense to their accountant. But here is the reality of how it works: it doesn't matter if you leave the cash sitting in your account or if you withdraw every cent in cash. You aren't taxed on your total balance or on the specific amount you withdrew; you are taxed on the net difference between your total income and your total expenses, which constitutes your actual profit. Think of it like this: if you don't withdraw the money and just let it sit there, but you have zero business expenses to claim, you're in the exact same position as if you had withdrawn it all. Without those costs to offset the revenue, everything left over is simply treated as taxable income.
You can't exactly expect to pay peanuts when you're pulling in a massive income. Before anyone jumps into starting a business, they really need to sit down with their numbers and crunch them on paper first. It’s all about weighing the pros and cons of being a sole proprietorship versus an LLC—especially when you factor in that flat 20% tax rate. You have to run the math to see which structure actually leaves more money in your pocket.