In five years, the U.S. Bureau of Labor Statistics projects that the number of self-employed workers will increase to 10.3 million – from the roughly 9.6 million counted the decade prior (in 2016). This growth reflects a rate that is outpacing what is projected for all workers – nearly 8% versus 7.4%.
U.S. Census Bureau researchers attribute such keen growth to an onslaught of factors, which were well underway before COVID-19 was a household-altering name. The rapid rise of digital marketplaces and online platform-mediated work opportunities represent the technological forces, whereas the social elements that hold sway revolve around flexibility, with regard to both time (and how to use it) and access to the labor market. Employees are no longer working within the confines of their geographic market; a world of employment opportunities await. The same benefit applies to those solopreneurs as they embark on hiring for the first time; a world of talent awaits at their fingertips.
Spread your wings – get off to a great start!
Of course, “self-employed” does not immediately mean “sole proprietor.” Likewise, just because one’s business does not have any paid employees (aptly-titled “non-employer” status), does not mean it falls under the “sole proprietor” umbrella. As April 15 continues to inch its way toward us, it is important to understand that sole proprietor term as a tax status. Self-employed individuals may choose to incorporate and register as a Limited Liability Company (LLC). The business is considered a “sole proprietorship” by default if one does not register or incorporate. While incorporated non-employers are quite rare, they’re not unheard-of; in fact, the U.S. Small Business Administration reports around 95% of these businesses are unincorporated. We can compare these rates to the 75% of self-employed workers whose operations are unincorporated.
Really, tax implications and planning start at the point of incorporation. If one chooses to remain a sole proprietor, he or she is also choosing:
For the business to be linked to the owner; unlike LLCs, which exist separately from the owner
As such, you are taking on the risks that come with the business being inextricably linked to your personal assets – from your savings to your properties
For tax purposes, sole proprietors report income generated from the business on their respective tax forms
Another way to think of these distinctions is that sole proprietors are to workforce arrangements what “DIY” is to the home improvement business – there is no real difference or space between you, the proprietor, and your business. With these fundamental structural considerations as a jumping-off point, let’s leap into timely, seasonal considerations that also account for the “high-strangeness” that was 2020.
You are entitled to a deadline extension – should you use it?
If 2020 has taught us anything, it’s to use the opportunities for relief that are provided to us. If you think you will be in a horrible bind to file accurately, completely and without inducing a breakdown on or by 4/15, you may buy yourself a little more time. Use Form 4868 to extend the deadline to October 15 instead. This can make a world of difference for the sole proprietor, as you already have so much on your plate to consider when preparing your return. In part, you have COVID-19 tax relief provisions to evaluate and account for (more on that later). If you are concerned about your ability to file on time, which can be a costly mistake as penalties pile up, it may make sense to consider this option. Notably, because how you file this year not only affects your tax bill today – but also affects future-year tax liabilities.
We encourage you to perceive tax time not as a season or deadline, but rather as an ongoing process. By partnering with tax professionals, ongoing collection of documents and accounting for relevant changes can save significant headaches, stress, and money at tax time. Cost savings is two-fold; liabilities are minimized and costly penalties (for the likes late filing) are avoided.
Get on track with write-offs
Sole proprietors may be eligible to deduct a number of “run-of-the-mill” business expenses incurred over the course of operations. However, do not get too “loose” with your interpretation of business expenses. Generally, a sole proprietor may write-off the home office – if he or she has no other option that is open to conduct business in the COVID-19 era. Additionally, that space should only function as an “office,” not partly as a play room, a guest room, storage area, or hobby corner. Alternately, you may write off your dedicated storefront or other bricks and mortar used in conjunction with your business operations. If both options are legitimately characterized as your office, you can also deduct whatever you spend on associated furnishings and equipment for the business. These expenses could range of a steady supply of paper and ink, to new chairs, desks, signage and artwork.
Additional potential opportunities to save on your taxes include:
Banking fees related to business accounts, and the premiums that you pay to insure your business.
Mileage that is directly related to the business, such as travel to and from client engagements, and professional and personal development (networking events and training). Miles may also be deducted at a reduced rate for travel related to volunteering for charities and community organizations. Associated travel costs must be exclusively for business travel, and not for personal travel that may be “blended” in with a corporate trip; for example, lodging over the course of conducting business is ripe for the write-off picking. Hotel stays and associated expenses related to a weekend trip for you and your visiting loved ones will wither on the vine, and not hold up to scrutiny.
Training to build your skills or otherwise enrich you professionally can be deducted. This might include dues to professional organizations, membership fees to trade groups, subscriptions to trade publications, webinars and online coursework, even books designed to further your knowledge in your given area.
Don’t let COVID-19 relief $$$ go unused
You may be leaving funds on the table that can are designed to help solopreneurs just like you. In a recent ruling, the loan formula related to Paycheck Protection Program (PPP) requirements for sole proprietors (filers characterized as “Schedule C”) was adjusted to allow for them to apply for loans that equal their gross, rather than net, income. In turn, this formula removes taxes and other expenses. While it may be too late to apply for the “early bird” lending window, available to the smallest borrowers, you can still submit an application during this second round of PPP funds until the end of March.
Other big forms of relief for the smallest of proprietors include tax credits associated with the Families First Coronavirus Response Act. The FFCRA provides credits for eligible businesses, which go toward covering the costs of providing paid sick leave and family and medical leave for employees. The leave must be a direct result of COVID-19 exposures. And, at the time of this writing, the employees’ leave must have been taken between April 1, 2020 to March 31, 2021.
Updates to the CARES Act also modified and extended the previously-established Employee Retention Credit through the end of June. To be eligible for a maximum credit of $7,000 per employee (per calendar quarter), employers must experience a full or partial suspension of their trade or business due to COVID-19-related government shut-downs and commerce shut-downs. Alternately, eligible employers must document a decline in gross receipts in 2021 that are less than 80% of the receipts in the same calendar quarter in 2019.
Take advantage of the Qualified Business Income deduction
An outgrowth of the Tax Cuts and Jobs Act, this deduction applies for up to 20% of Qualified Business Income (QBI) from a sole proprietorship or an LLC treated as a sole proprietorship. There are restrictions related to higher income levels, and qualifying taxpayers claim the deduction on their 1040 due either April 15 or October if you request an extension on your return. The QBI represents those areas that can get a little tricky. So, we encourage you to reach out to your tax professionals at O’Donnell, Ficenec, Wills & Ferdig.
OFWF has guided sole proprietors and small businesses at every stage of their operations, from start up to succession, for more than seven decades. So, you never really fly solo! You have support that you can count on. We look forward to partnering with you. Contact our team of experienced tax and accounting professionals.