In our first installment of the Business Basics series, we’ll discuss the logistics of a Sole proprietorship, and how it works for your business and your self-directed retirement plan.
Sole Proprietorship Fundamentals
A Sole Proprietorship is the simplest form of business for the self-employed individual. Sole proprietor simply means sole owner.
As a sole proprietor, you can work for a company as an independent contractor. Alternatively, you can work for yourself and sell your own goods and services.
Some common examples of self-employed income for a sole proprietorship include, but are not limited to:
- Selling items online (through places E-bay, Craigslist, Amazon, Facebook market, etc)
- Driving for Uber/Lyft as an independent contractor
- Freelance editor/copywriter
- Consulting for a company as an independent contractor
As a Sole Proprietor, you’re responsible for paying self-employment taxes on the income you earn. The IRS recommends doing this by paying estimated taxes quarterly. Alternatively, you can wait until the annual income tax filing deadline (April 15th of each year).
When you work as a sole proprietor, you’ll report your income on your personal taxes on Schedule C. Most companies will send you a 1099, making it easier to track your income. However, you’re ultimately responsible for tracking all of your income. If you make estimated tax payments through the year, you’ll likely either have a refund (for overpayment) or owe money (for underpayment).
A Sole proprietorship is easy to set up and maintain, but doesn’t provide the personal liability protection that an LLC or Corporation does.
Sole proprietorship with an EIN
As a Sole Proprietor, you may not want to give out your Social Security Number to every person and/or company who needs it to pay you. In this case, you can obtain an EIN (Employer Identification Number) from the IRS. The IRS has made this process easier by allowing you to apply for your EIN online. You can obtain your new EIN within minutes. Then, use your new EIN in lieu of your SSN with doing business with your Sole proprietorship.
Retirement Plan Contributions
Contribution limits for a sole proprietorship are fairly straightforward. If you have a self-directed Solo 401k, fill out a contribution form to document contributing new money to your plan. File the contribution form with your records and share it with your CPA. Then, deposit the funds into your Solo 401k bank account.
A sole proprietor is self-employed. Therefore, you are both employer and employee. When making contributions to the Solo 401k, you can make employer profit sharing contributions of up to 20% of your net compensation (up to $55,000 for 2018 and $56,000 in 2019). You can make employee contributions of up to 100% of your earned income (up to $18,500 in 2018 and $19,000 in 2019).
The total maximum for both of these contributions together is $55,000 in 2018 and $65,000 in 2019.
The Sole proprietorship is the default formation for a self-employed individual, though there are some advantages both with the LLC and Corporation set up. Discover which option is best for you for greatest profit potential and the ability to grow your nest egg faster.