By Karen E. Klein Q: I recently opened a small bookkeeping business and need to know what taxes to file and when they are due for 2002. -- E.A., Houston, Tex.
A: While operating any business can be taxing (in more ways than one), a sole proprietorship typically makes the simplest tax-filing demands. Unlike a partnership or corporation, there are no separate income tax returns for the business to prepare and file, and there are no payroll tax returns to prepare and file unless you have employees other than yourself.
"On an annual basis, you will prepare and file a Schedule C -- or the even simpler Schedule C-EZ -- to report the profit or loss from your business," says Fred Grant, a senior tax analyst for business accounting software provider Intuit. "If your business is profitable, you will also file Schedule SE to report any self-employment tax, which is essentially the sole proprietor's equivalent of the Social Security and Medicare taxes that are withheld from an employee's paycheck." The extra schedules (Schedule C and Schedule SE) should be filed with your regular tax return (Form 1040) that is due on April 15, 2003, Grant says.
You should also consider filing Form 1040-ES (individual estimated tax vouchers) on a quarterly basis if your business is profitable. The purpose of estimated tax is that the IRS wants to collect both your income and self-employment taxes throughout the year, rather than wait until Apr. 15th of the next, Grant says. "Failure to timely pay estimated tax can result in penalties. For 2003 business activity, Forms 1040-ES, along with any required payments, are due Apr. 15, 2003; June 16, 2003; Sept. 15, 2003 and Jan. 15, 2004." Pay careful attention to your estimated tax, he advises. "New business owners are often surprised by how quickly the amount of self-employment tax adds up."
Don't forget about state and local tax filing obligations. States and cities with income taxes will require you to report your business profit or loss, using Form 1040 and Schedule C as your starting point. "Most service businesses, such as a bookkeeping service, generally are not required to collect and remit sales tax," Grant says. "Other businesses, such as retail stores, are generally required to collect sales tax from their customers and file periodic sale and use tax returns." Contact your state tax board for more information.
You should also be on the lookout in case you are required to pay county business property taxes, which are usually annual taxes assessed as a percentage of the value of the equipment and property used in your business. Cities also frequently collect annual business license fees and taxes, so check with your local jurisdiction about that possibility as well.
Sound like a lot of requirement for a "simple" sole proprietorship? At least you can take some solace in the fact it this is still a shorter list than what corporations and partnerships face, Grant says. "One of the most important things is to be sure to plan ahead and take advantage of all the business deductions you are entitled to, in order to minimize both your income tax and self-employment tax," he says.
You may find that using a small business software program like QuickBooks or Peachtree will help keep you organized and manage your accounts and bookkeeping, both for yourself and your clients. It's also a good idea to work with a professional accountant at tax time, which will help ensure accurate and timely filing and allow you to focus on business.
Editor's note: When it comes to marketing, Corporate America bandies about big words -- branding, product launches, value-added -- and backs them up with bigger bucks. Meanwhile, small-business owners implement huge marketing efforts on small budgets. BusinessWeek Online's SmallBiz would like to recognize these small businesses, give their strategies a boost, and share their successes. So, if your marketing drive achieved good results, send us an e-mail at firstname.lastname@example.org and tell us what you're doing. We will choose the most interesting submissions, interview the business owners, and have a marketing expert comment. Karen E. Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.