Accounting for Sole Proprietors: Tax & Bookkeeping Tips

Exactly. If an LLC is sitting at a 20% tax rate, it’s frankly absurd that a sole proprietor gets hit with a staggering 40%. I mean, realistically, both entities are justifying the same types of expenses; what extra hoops is a freelancer supposed to jump through? 😁
Don't get me wrong, I follow the logic, but you often see these ridiculous takes online claiming, "Go ahead, spend it! It's your money!"—completely glossing over the fact that you're going to owe a 40% tax bill on it later.

John Doe

David Mitchell4 said:Exactly. If an LLC is sitting at a 20% tax rate, it’s frankly absurd that a sole proprietor gets hit with a staggering 40%. I mean, realistically, both entities are justifying the same types of expenses; what extra hoops is a freelancer supposed to jump through? 😁
Don't get me wrong, I follow the logic, but you often see these ridiculous takes online claiming, "Go ahead, spend it! It's your money!"—completely glossing over the fact that you're going to owe a 40% tax bill on it later.

I think you're totally missing the fundamental differences between an LLC and a sole proprietorship, and trust me, there are plenty of them; otherwise, nobody would bother setting up a formal business structure.
As for spending money from the business account, you're paying taxes on those earnings whether you pull the cash out or just let it sit in the bank. You can't have your cake and eat it too—if you're paying a higher tax bracket, it just means you've actually made more money.

Just this comment: 🙄

John Doe

David Mitchell4 said:Exactly. If an LLC is sitting at a 20% tax rate, it’s frankly absurd that a sole proprietor gets hit with a staggering 40%. I mean, realistically, both entities are justifying the same types of expenses; what extra hoops is a freelancer supposed to jump through? 😁
Don't get me wrong, I follow the logic, but you often see these ridiculous takes online claiming, "Go ahead, spend it! It's your money!"—completely glossing over the fact that you're going to owe a 40% tax bill on it later.

Well, if that's the case, why not just incorporate? If you switch to an LLC or a C-corp, you'd only be looking at "just" 20%.

If I want to lower my tax bill, I have to pump up my business expenses. But if I'm spending more, there’s less money left over to put toward my quarterly estimated payments. Honestly, I am so incredibly pissed at myself because I’m looking at a 40% tax hit on one portion of my income from 2015. My revenue actually went up, and I even picked up a tax credit for professional development training. But of course... I made more money, so now I just get penalized by having to pay more.😉))) So, shadowdrifter99 is totally right about this. As for me, I’m definitely doing things differently this year. 🙂))))

Keith Martinez5 said: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

They did—they dropped by 15%. For Group 1.A, it went from 0.20% down to 0.17%; for Group 2.A, it was 0.16% and is now 0.136%.
I'm also looking for stuff geared toward small businesses. I switched over to the Microsoft Internet version at the start of the year—someone mentioned here that it was decent, and honestly, it’s hard to beat the price point;
as far as small businesses go, my impression is that they all tend to have a bit more breathing room in their coverage.👎

David Mitchell4 said:Exactly. If an LLC is sitting at a 20% tax rate, it’s frankly absurd that a sole proprietor gets hit with a staggering 40%. I mean, realistically, both entities are justifying the same types of expenses; what extra hoops is a freelancer supposed to jump through? 😁
Don't get me wrong, I follow the logic, but you often see these ridiculous takes online claiming, "Go ahead, spend it! It's your money!"—completely glossing over the fact that you're going to owe a 40% tax bill on it later.

But here's the thing—an LLC pays a flat percentage on the net profit, whereas a sole proprietor gets pushed through those progressive tax brackets. If your margins aren't massive and you don't "hit" that 40% wall, it actually makes sense. Plus, corporate owners pay taxes when they draw distributions from money they already paid the 21% on, but if I remember correctly, sole proprietors don't deal with that same double layer. We operate as a profit-based sole proprietorship, so we have that huge legally defined business expense deduction of $8,800, where you're looking at roughly $1167 in combined taxes and payroll contributions. If you honestly expect to pull in enough cash every single year to stay in the highest tax bracket, you could always file to be taxed as a corporation instead—just saying, that business deduction is a pretty significant chunk of change...

Alright, look. Sure, the tax rates for sole proprietors can be pretty steep, but honestly? You’ll just have to learn how to live on what you actually pull in and get into the habit of tracking every single cent coming in and going out.

The absolute best part about being a freelancer compared to running an LLC—where you're constantly paying taxes just to move money from your business account to your personal one—is that we can all just grab cash whenever we want without jumping through hoops.

Or, if you want to look at it the "official" way: you’ve got a right to a tax-free chunk of change... about $2,600 a month, assuming you aren't claiming any dependents.

But yeah, at the end of the year, once the accountant runs the numbers and looks at the bottom line, you'll find out exactly how much the government is taking from you. And don't get it twisted—that amount isn't strictly tied to how much cash you're physically withdrawing from your bank account. It’s related, sure, but it's not a direct 1:1 thing.

placidlynx92 said:They did—they dropped by 15%. For Group 1.A, it went from 0.20% down to 0.17%; for Group 2.A, it was 0.16% and is now 0.136%.
I'm also looking for stuff geared toward small businesses. I switched over to the Microsoft Internet version at the start of the year—someone mentioned here that it was decent, and honestly, it’s hard to beat the price point;
as far as small businesses go, my impression is that they all tend to have a bit more breathing room in their coverage.👎

Thanks for the tip! I’ll definitely give that a shot. Since I handle the bookkeeping for my own small business rather than doing this professionally, any little bit of guidance or help really goes a long way for me. Now, could you let me know what the rate looks like for Category 3.A?🙂

http://nytimes.com/articles/example-link Well, I finally managed to track down the full table! Just dropping it here in case anyone else is hunting for it—hopefully, this saves you some time and a bit of a headache.

Man, I already went down that same old path.

But does that actually count toward the 2015 totals, or are we looking at the 2016 numbers instead?

amberbadger17 said:Man, I already went down that same old path.

But does that actually count toward the 2015 totals, or are we looking at the 2016 numbers instead?

It clearly states they apply to the 2015 tax year...

But it says the law enters into force on January 1st, 2016. Hmm...

Keith Martinez5 said:It clearly states they apply to the 2015 tax year...

It states the law entering into force is January 1st, 2016—which, logically, should affect the 2016 calculations. 😉
That’s how we've handled things up until now, anyway, but at the seminar, they actually mentioned that the old rates would still be used.🕺

To makes perfect sense to me as well. If we look at how things were handled back in 2015, it follows the same pattern, especially since the documentation states the changes are law entering into force on January 1st, 2016.
Essentially, once we hit January 1st, those new rates kick in immediately; they aren't going to apply them retroactively to the previous year.

Brenda Chase3 said:To makes perfect sense to me as well. If we look at how things were handled back in 2015, it follows the same pattern, especially since the documentation states the changes are law entering into force on January 1st, 2016.
Essentially, once we hit January 1st, those new rates kick in immediately; they aren't going to apply them retroactively to the previous year.

Up until now, the standard approach has always been to look at the date the law enters into force—but since everything seems to be shifting lately, I’m honestly just a little worried that things might have started moving backward behind my back without me realizing it.🤣

The tax filings for 2015 are still being processed using the old rates! But get this—all the prepayments for 2016 are already hitting based on the new rates...

Article 6.
This law will be published in The New York Times and the law entering into force is January 1, 2016.

E x p l a n a t i o n
Articles 1 and 2.
These articles reduce the membership fee calculation rates by 15%—following the Decision to reduce parafiscal levies in 2015 and the targets set for reduction in 2016—and establish a Commission to monitor the implementation of those levy reductions.
Article 3.
This article proposes a much simpler way to handle membership payments, especially for the small business owner; rather than dealing with monthly headaches, fees would be paid just four times a year, which essentially means less paperwork and lower overhead costs for small businesses.

So, here is a snippet from the law—but I'm stuck on one thing: which specific rates should we actually use? It mentions reducing parafiscal levies in 2015, so—in my opinion—that might apply to this current year too, though I wouldn't bet the farm on it...

A B C D
First group 0.2000 0.1840 0.1600 0.1440
Second group 0.1600 0.1440 0.1200 0.1040
Third group 0.1200 0.1040 0.0800 0.0640

Which means we probably need to calculate based on these figures for 2015...

The decision was officially reached back in 2015, though the actual goal is to see those numbers drop throughout 2016, with the law entering into force on January 1, 2016.

Brenda Chase3 said:The decision was officially reached back in 2015, though the actual goal is to see those numbers drop throughout 2016, with the law entering into force on January 1, 2016.

Oh, fantastic... honestly, wouldn't it be just wonderful if we could actually pay less right now?