Sole Proprietorship - Taxes

Discussion in 'Accounting and Taxes' started by duki, Sep 17, 2010.

  1. duki

    duki
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    Hey Everyone,

    I just started up a business with a friend of mine doing some consulting work. For ease of bookkeeping, we registered the business as a sole proprietorship under my name. We really don't make enough income to justify the headaches of a payroll, employee taxes, employee insurance, or anything of the sort - maybe an extra $5000/each per year. How should I handle taxes on that? Can I (as far as book keeping goes) consider him a contractor for the company even though we're 50/50 on income? If we both note our additional income during tax time, will we be clear if we're audited? What do you guys suggest?

    Also, as another small question, is it bad business practice to just keep a single document (ledger) for my business expenses/income? Since we typically only have 1 or 2 jobs per month, can I just use an Access template and record my income/expenses in one document? Or do I really need to keep separate journals for everything?

    Thanks for any help!
     
    #1 duki, Sep 17, 2010
    Last edited: Sep 17, 2010
  2. Fergal

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    duki welcome to Business Advice Forum and thanks for posting your question. The answers will depend on the jurisdiction that applies to you. What country or state is your business registered in?
     
  3. duki

    duki
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    Thanks for the reply! WV - Mercer County
     
  4. ArcSine

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    Duki, what you've proposed--to keep things simple--is reasonable. Mechanically, it'd play out something like this:

    Suppose you guys had 11,000 in total revenues for the year, and 2,000 of misc expenses, for a net profit of 9K--which you split 50/50.

    You would put a Schedule C into your 1040 which would report Revenues of 11K; Payments to contractor, 4,500; and Misc expenses, 2K; for a net bottom line (taxable to you) of 4,500. In other words, you'll pick up all the revenues and misc expenses, and deduct as an expense your partner's cut of the net.

    Your partner would also fill out a Schedule C on his personal return as well. He'll simply report his "independent contractor" receipts (4,500) as revenue, and no expenses.

    At the end of the day, you're both reporting net taxable profits of 4,500, just as you've intended.

    If your net profits are >= 1,200 (such that you're making payments to Partner of >= 600 in any one year), be sure to give him a 1099 on which you report his payments. Also, if you guys are knocking down enough income, you might wanna check into making quarterly estimate payments for your federal (and WV, possibly) taxes. A tax pro can walk you through it.

    Regarding the single-vs-multiple ledger issue, a single ledger is sufficient. As long as there are fields which (e.g.) identify things like the date on which an expense was incurred; the nature of the expense; the job with which a revenue receipt is associated; etc., you should be fine. You can then use Access's (or Excel's) sorting and filtering functionalities to analyze your data later, should you need to.

    Besides, job-by-job breakdowns are mostly irrelevant for tax purposes. On your return you report total revenue for the year; total office supply expense; etc. You'll just need to be able, at return-prep time, to aggregate your year's expenses into various categories (such as travel, telephone, and so on). On that point, you could have a look at a Schedule C to see the expense categories thereon, and then use that as a guide for developing expense categories in your ledger.

    Cheers, and have a great weekend.
     
  5. duki

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    Amazing info. Thanks!
     

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