Help with sole proprietor income / tax / solo 401k transactions?

JoeBlow

I'm looking for advice as to how to enter standard sole proprietor transactions. Referral to a book or web site would be nice.

I currently have a W-2 job and plan to start a sole proprietorship. I earned a business degree long ago but have never been responsible for self-employment taxes or estimated tax payments.

I understand that sole proprietor business income is, in effect, personal income, the difference being that I have to pay self-employment taxes on it. I also understand that I can open a solo 401k and, in addition to individual contribution limits, as "employer" I can contribute an additoinal 25% of my earnings, subject to limits.

I'm a long-time Quicken user and know about associating income and expense categories with tax lines. I'll record business-related expenses as Sch C expense items and reduce those same expenses should I get reimbursed. What I don't know is how to record the normal transactions in Quicken so as to capture the information in relevant tax categories.

I entered a test income transaction and observed that the tax planner forecasted half of the SE tax as an adjustment in the tax planner. How do I record tax liability? Does it not exist on paper until calculate my liability quarterly and record the estimated payment linked to that tax line? Is there a separate payment or tax line for SE tax?

As for a 401k, I found the tax line for SEP deduction (or simple or Keogh or whatever). It seems obvious that's for my personal contribution but how do I record the "employer" portion?

Thanks for any advice.

Unknown

As a sole proprietor, you ARE the employee and employer.

There is NO employer contribution to a tax deferred retirement account.  It's all the same, therefore there is only one tax line item.  KEOGH, SIMPLE, SEP or tax deferred 401K...it's all treated the same.  It's all YOUR money.  There is no corporation and you're not an employee...you're the owner.  The amount you can defer from taxes is a total amount based on your net income from your Schedule C sole proprietorship tax form.  

As to the "other half" of the self employed taxes (social security and Medicare), usually these are paid as part of your estimated taxes quarterly.

Since these are calculated as part of your yearly tax return, I never categorized separately my estimated taxes due and then the self employed tax portion.  It's all one payment to the IRS, so there is no need to categorize them.

I would just categorize your quarterly payment to the IRS (the total amount for the quarter) as it should be with tax line item 1040-ES (Form 1040:Federal estimated tax, quarterly).  I never budgeted an estimated amount separately for the self employed tax.  I just rolled it into one category, as mentioned earlier, and this is all part of the quarterly estimated payment.  

I suppose, since the SE tax portion is 15.3% you could breakdown the estimated quarterly tax payment by applying the other 84.7% to income tax and the 15.3% to SE tax...but there really is no reason too.  It's just part of the total taxes you owe Uncle Sam. 

When it's tax time and you calculate your taxes, if you have any payment due then categorize it as 1040 Taxes Paid...and since there is no deduction for paying taxes you actually owe, there is no tax line item for that.  

If you have a tax refund due to overpayment, then categorize it as an income category 1040 Tax Refund and once again, there is no tax line item assigned since it's your money you already paid that is refunded.  

And finally, any money you take as a "salary" is just a transfer from one account to another, if you have separate accounts for your business and personal.  There is no W-2 issued from your business to you.  Taxable income is EVERYTHING you bring in as income from your business.  

In an S Corp, you would be an employee of the corporation and you would be paid a salary, which is different than the income the corporation earns.

In a sold proprietorship, EVERYTHING you earn from the business is taxable income and your net income is that taxable income less any eligible business expenses.  

If you are new to this, it would behoove you to hire a good tax accountant.  They can help determine what forms you need to file, how to file and what amounts you should be basing the amounts you need to pay quarterly.  Ask the accountant if he can get you going, explaining so that you can ultimately fill out all required forms and calculate the amounts due.

And finally, for full disclosure, I am not an accountant and can not offer you tax or legal advice.  I just owned my own business for 36 years as a sole proprietorship and can offer you my personal experience.  

JoeBlow

Thanks for the insight. I planned to consult with an accountant before starting up. I'm just trying to do some projections in Quicken before I get to that.

Regarding the 401k, I've read that I can contribute up 20% of net salary in a 401k, with an annual total limit of $61K. (I'm 62.) As it was described as a separate portion it sounded like the transactions had to be characterized separately.

Likewise for the taxes, since you can deduct 1/2 of the SE tax off as an adjustment, it sounded like that also was recorded separately.

It sounds simpler than I thought it was.

JoeBlow

2nd question: do you record any of the routine transactions as scheduled bills? Or is your income as a sole proprietor too variable to be predictable?