Do Sole Proprietorships Get a Tax Refund?
Like conventional employees and stakeholders in business partnerships and corporations, sole proprietors receive tax refunds if they have overpaid on their taxes. Tax payments for a sole proprietorship can be tricky because the owner's income is based on his company's profit and loss for the overall year. His tax payments are based on educated guesses regarding the amount of profit his business is earning as well as his tax liability from the previous year.
Sole proprietorships pay estimated taxes based on good-faith assessments of how much profit their businesses are earning. Estimated tax payments are due on April 15, June 15, September 15 and January 15, unless a payment date falls on a weekend, and business owners can make payments anytime they want as long as one quarter of the estimated liability is paid by each due date. A sole proprietor also may base estimated tax payment amounts on her tax liability from the previous year.
According to the Internal Revenue Service, a sole proprietorship's earnings equal the company's profit or loss once deductible expenses have been subtracted from total revenue. Deductible expenses include payroll materials, office supplies, rent and auto expense. Regardless of the amount that a sole proprietor has withdrawn from his business in the form of personal draws, his tax liability is based on profit and loss figures, which may differ from the funds the company actually has available because some expenses, such as depreciation and standard mileage deductions, do not directly correspond to cash spent.
In addition to income tax, sole proprietors pay self-employment tax, which consists of payments to Social Security and Medicare funds. While company employees pay an employee share of these taxes supplemented by an employer contribution, sole proprietors pay both the employer's and the employee's share. However, the amount equivalent to employer's share of these taxes may be written off against the owner's income when calculating the basis for her income tax liability.
Sole proprietors are entitled to tax refunds when the estimated tax payments they have made throughout the year exceed their tax liability based on the company's overall profit and loss. Because it is more complicated for a sole proprietor to prepare profit and loss statements than for an employee to simply enter the amounts on his pay stubs, some sole proprietors may not be able to calculate precise earnings according to the IRS estimated tax deposit schedule. The federal income tax form, due on April 15, is an opportunity to reconcile the amounts that have been paid with the amounts that are owed.