Do I Need to Pay Taxes if I Do Not Make Revenue As a Sole Proprietor?

By Laura Payet

Do I Need to Pay Taxes if I Do Not Make Revenue As a Sole Proprietor?

By Laura Payet

Even if you haven't earned revenue from your business, you may still need to pay taxes. And even if you don't owe the Internal Revenue Service (IRS) anything, it's still a good idea to file a return. As a sole proprietor, you report your professional income and expenses on your individual federal return. You do not file a separate return because it does not exist as an entity separate from you.

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Paying Taxes as a Sole Proprietor

As a sole proprietor, you report your entity's income and expenses on federal Form 1040 Schedule C, Profit or Loss From Business (Schedule C, 1040). If your completed Schedule C indicates that you earned a profit, you must pay fees on that amount. You must also complete Schedule SE, Self Employment Tax (Schedule SE), and pay Social Security and Medicare fees. These employment expenses are calculated based on your profits. As of 2018, if you earn more than $400 in self-employment income, you must file a return.

But even if your company hasn't earned any revenue, you may still need to pay if you've had income from other sources. For example, if you own rental property, earn income from another job, or file jointly with your spouse who earns a salary from his job, you will likely owe money on this income. The IRS website offers a tool to help you figure out whether you need to file a return for any particular year. And don't forget state fees. You may be required to file state returns even if your sole proprietorship is unprofitable.

Filing a Return if You Don't Owe

Even if you don't owe income or self-employment taxes, it can be a good idea to file a federal return anyway. First of all, you may be entitled to a refund or credit. Second, you may be able to write off your business losses against income in future years to reduce any future burden. Third, if you don't file a return but the agency thinks you should have, it can file one for you. It's called a substitute return, and it's probably not good news.

A Substitute Return

If the IRS thinks you owe and you haven't filed a return, it can file a substitute form on your behalf. It is based on information that they have about you from other sources, and may not include all the deductions and credits you are entitled to. They will send you a notice of deficiency proposing an assessment. You then have 90 days to consent to and pay it, file your own return, or file a petition with the United States Tax Court. When you file your own return, the agency will generally adjust your account to reflect the correct figures. If you fail to respond to the deficiency notice, they will assess the proposed fees against you and begin collection proceedings. You can avoid this entire process simply by filing your own return even if your business has no revenue.

If you're unsure about what you might need to pay in terms of taxes for your company, or even whether a sole proprietorship is the best format for you, you can consult a tax professional for help with getting the most out of your business.

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