Hey y’all,
I am newly in business for myself and I have a possibly stupid tax question. I am a sole proprietor and I know I have to pay taxes on the personal income I make from the business(about 20%).
Do I have to pay taxes on my operating expenses(i.e. indirect job costs/overhead, etc.)? If so about how much? I know I won’t have to pay taxes on the whole amount depending on how much I can deduct but I know those expenses are not a dollar for dollar deduction. Is there a rule of thumb percentage I can use to get started with untill I see how things work out?
How about my profit?
Can anyone help me?
Replies
dog... get a schedule "C" for your 1040.. all of your expenses are itemized on that..
everything left over after your expenses is your gross income
When I started my first business, two best decisions I made were to get myself a good CPA and a good atty. Each gave good advice that helped me many times over. Also, consider taking a course in acct at the local community college or taking a SCORE seminar. To run a profitable business, you need to understand business structure and accounting better than can be taught here.
see ... same advice within one minute of each other!
btw ... just got a call back from SCORE ...
meeting the dude on Mon morn.
Jeff Buck Construction
Artistry in Carpentry
Pgh, PA
Several times now, Ive seen the mention of SCORE.
Does anyone know their website? I did a search and came up with a bunch of junk.
Use SBA SCOORE (Small Business Administration)That will find it.
score.org
some of the best advice anyone ever gave me ....
get a real accountant!
U still have time.
I've "saved" wayyyy more than it could ever cost.
byw ... some old guy named mike smith once said ...
get an accountant, lawyer, bail bondsmen, etc that are all about yer same age. Don't use your Dad's .... because by the time you "really" need them ... they'll be like yer Dad ... retired!
He's a smart one, that smith kid.
Jeff
Buck Construction
Artistry in Carpentry
Pgh, PA
Definitely get a good CPA. One who is familiar with the construction industry.
A good one can save you MUCH more than he costs... and better yet... keep you out of the audit chair (by not doing stupid things that throw up red flags that lead to audits). Time is money... and audits take time.
I wouldn't give up my CPA for 15 lead carpenters (with 20 yrs experience each) at $9/hr. How's that for showing just how valuable a good CPA is ??!!! If he ever retires... so will I. LOL
The others are right.
But here are some of the basics.
You list all income and from that you deduct the exepsnese.
Now most of the time are simple. Materials and supplies.
But overhead that you paid out in also a deductable expense, for example insurance and advertising.
But time that you figure for sales calls is not, as it is not something that you pay cash for.
But capital equipment is depreciated. But in most cases you elect to expesne it all out in one year.
Vechicle expense can either be figured on actual expesnes (deprecitaion, maintance, fuel, etc) or by taking a standard milage deduction.
But can only take it for buiness milage.
"I am a sole proprietor and I know I have to pay taxes on the personal income I make from the business(about 20%)"
You will also be paying Selfemployement taxes on the business profits. That is the combined employee/employer social security/medicare taxes. It nets out to about 13%.
In the interest of a diversified discussion...let me suggest this.
If you're just starting out and have the interest, get TurboTax. It'll walk you through your expenses, explaining what you can fully deduct, what you must depreciate and how this is calculated. It'll take time, but collecting invoices/receipts, organizing them and sitting before your accountant and answering his/her questions, reviewing forms and listening to explanations will also take time.
But walking yourself through expenses, sources of income and how these are organized on your Schedule C, form 1099 (for subs), SE and ultimately your 1040 will help you understand this stuff as more than just a bunch of numbers, and a vital part of your work.
Sole proprietorship is fine when you are small and starting. But as you grow and build net worth, asset protection through incorporating will likely be necessary.
Also, don't forget to pay yourself; both current income and retirement plan contributions. TurboTax will also help you with this.
BruceM
A slightly different software suggestion: get QuickBooks Pro and the book by Karen Mitchell on using it for a contracting business. Set up the chart of accounts that she suggests (with your own tweaks for what you're doing) and start using it to track all expenses, receivables, payables, etc. etc. It only costs a few hundred bucks at CostCo, and if you use it to enter your financial stuff you will be instantly very organized. You may want your CPA to consult in the beginning so that you are categorizing things correctly. At year's end you can give a disk to your CPA to deal with taxes, or do them yourself.