Once you decide to launch a business or start working for yourself, it takes time to establish your business entity. If taxes are due before you have an LLC or an S-Corp, you may be wondering: what does that mean for your taxes? Here are the answers to frequently asked tax questions if you just started a new business.
Can I write off business expenses if I don’t have an LLC or an S-Corp?
Yes, even if you are filing as an individual, you can still write off business expenses. All businesses can deduct ordinary and necessary expenses from their revenue.
The IRS will tax you as a sole proprietor if you are the only owner. This means you will need to file a Schedule C or Schedule C-EZ to calculate the tax on your business. This will also allow you to deduct business expenses like mileage, home office, advertising, and many more.
Can a sole proprietor have W-2 employees?
Yes, sole proprietors are allowed to pay employees with a W-2. If you pay your employees with a W-2, their salaries and benefits count as labor expenses, which you will be required to report as a business expense. If you don’t want to do this, you can hire contractors and pay them with a 1099-MISC. These self-employed individuals are responsible for reporting their own taxes, so you will not deduct taxes from their wages.
Am I required to have a business license to be a sole proprietor?
To operate legally, any business entity – including sole proprietors – typically must obtain a business license. This will designate your business as legitimate. Not only do most jurisdictions require a business license to perform most trades and professions, but also for insurance and liability reasons. Depending on the line of work, you may need more than one license, including:
- Operational license
- Occupational license
- Federal licenses
Should I be collecting sales tax if I don’t have a business entity?
Yes, if you sell a product or provide a taxable service, you should be collecting sales tax. If you operate your business in Alaska, Delaware, Montana, New Hampshire, or Oregon, you don’t have to worry about state sales tax because these states do not charge it.
If I have an LLC business, do I also have to file a personal return?
Yes, if you are a member of an LLC, you must file a personal return. An LLC is what the IRS calls a “pass-through entity.” Any business profits or losses are passed through to the members of the LLC, who report this information on their personal tax returns. While the LLC does not pay federal income taxes, they may pay state income taxes. They must also file their own return, even if they are not responsible for paying the taxes because the taxes fall to the members.
If I have an S Corp, do I also have to file a personal return?
Yes, if you are a member of an S-Corp, you must file a personal return. Even though an S-Corp operates as a corporation, it is similar to an LLC because its shareholders pay the federal income tax on the business profits. The S-Corp is also required to file an annual tax return as well.
When should I open an LLC for my side hustle?
Starting an LLC provides your business with additional personal liability protection. This is the main reason most LLCs form. If you want to continue to grow your side hustle, you should become an LLC. Otherwise, by continuing to operate as a sole proprietor, you may be exposing yourself to unnecessary risk. It’s important to seek professional legal advice when deciding whether to form an LLC or remain a sole proprietor.
The information in this article is up to date through tax year 2021 (taxes filed in 2022).