Ultimate List of Tax FAQs for Independent Business Owners

Running a business is tough, especially if you’re a solo entrepreneur. Sales, marketing, accounting, taxes — you have to do it all. That’s where Lettuce comes in.

If you are a solopreneur, Lettuce can not only help you with all the paperwork needed to officially form a business, but also offer you specialized tax advice, and automated bookkeeping and accounting tools, so you don’t wind up overpaying your taxes by default.

Want to learn more about self-employment income, taxes, bookkeeping, or accounting? Check out our helpful guides and articles, chat with LettuceHead AI 24/7, or review our frequently asked questions below.

1. What is a solopreneur?

A solopreneur is an individual who runs their own business single-handedly. Unlike entrepreneurs who might build a team or have partners, solopreneurs manage all aspects of their business operations themselves. This includes everything from decision-making and financial management to marketing and customer service.

2. Is a solopreneur the same as being a sole proprietor?

While a solopreneur and a sole proprietor often overlap, they aren't exactly the same.

A sole proprietor is a specific legal business structure where the business and the owner are the same entity. This means the owner is personally liable for all business debts and legal claims, and taxes are paid on personal returns.

A solopreneur, on the other hand, refers to anyone who runs their business alone, regardless of the business structure. A solopreneur could operate as a sole proprietor, but they might also choose to set up an LLC or even an S-Corp for liability protection and tax benefits.

3. Can sole proprietors have employees?

Yes, sole proprietors can have employees, including contract workers.

4. Does a sole proprietor need an EIN?

A sole proprietor typically does not need an EIN if they have no employees and do not meet other specific criteria, such as being subject to excise taxes. However, an EIN is required if the sole proprietor has employees, operates as a corporation or partnership, files certain tax returns, and withholds taxes on certain incomes, among other things.

5. Does a sole proprietor need a business license?

Yes, though if you are a sole proprietor, the exact kind of license will depend on the nature of the business and where it operates. Even if your business is exempt from needing federal licenses, there are state, county, and city regulations to consider, and it is your responsibility to find out which ones are necessary.

6. How does a sole proprietor file taxes?

As a sole proprietor, you file your taxes on Schedule C of Form 1040, which is your personal tax return form. This means you report your business income and expenses directly on your personal tax return.

7. Do sole proprietors need a separate bank account from their personal ones?

Yes, every self-employed owner, including sole proprietors, should open a separate business bank account to capture business activity. This helps prevent the co-mingling of personal and business funds, making it easier to track income and expenses and maintain clear financial records.

8. Can a sole proprietor be an LLC?

By definition, a sole proprietor cannot be an LLC, but a sole proprietor can easily decide to form one.

9. What are the benefits of LLC vs. sole proprietorship?

The benefits to forming an LLC vs. a sole proprietorship include:

• Limited Liability: An LLC provides personal liability protection, shielding your personal assets from business debts and legal actions.
• Tax Advantages: LLCs offer more taxation options, including the potential to be taxed as an S-Corp, which can lead to significant tax savings.
• Credibility: An LLC can add legitimacy to your business, which can be beneficial for securing funding and building trust with clients and partners.
• Separation of Finances: An LLC separates your personal and business finances, making accounting and tax preparation more straightforward.

10. When should a sole proprietor become an LLC?

It depends on the direction of the business. If an owner runs a lean and fledgling enterprise, isn’t in a hurry to expand overhead by hiring employees, and wants to keep costs low, staying on as a sole proprietor is probably the best option. If an owner is keen to grow the business, becoming an LLC makes a lot of sense. It will protect the owner’s personal assets from losses associated with the business and open the business up to various federal and state tax benefits. A downside to forming an LLC is that doing so costs more money than operating as a sole proprietorship because of registration fees, and LLCs require more paperwork to be filed with the government.

11. How do you start an LLC?

Here’s how to start an LLC:

• Know State-Specific Rules: Understand the specific requirements for forming an LLC in your state.
• File Documents: Submit the necessary documents, such as Articles of Organization, to the Secretary of State.
• Create an Operating Agreement: Draft an agreement outlining the rights and responsibilities of the members and the operational procedures of your business.
• Obtain an EIN: Get an Employer Identification Number (EIN) from the IRS for tax purposes.
• Check Local Licensing Requirements: Ensure you have all the necessary local licenses and permits.
• Open a Business Bank Account: Keep your personal and business finances separate by opening a dedicated business bank account.
• Update or Create Company Advertising: Make sure your business name and branding are up-to-date and compliant with local regulations.

12. What is a registered agent?

A registered agent is responsible for receiving legal and tax documents on behalf of your business. This includes important paperwork like service of process, state correspondence, and compliance documents.

13. How much is it to start an LLC?

Again, it depends on the state where the limited liability company operates. Filing fees and taxes in particular will vary state to state. However, the overall costs can tally up to a few thousand dollars. The reason: You have to factor in several other components, including operation agreements, registered agent fees, doing business as (DBA) fees and business licenses. The good news is you can write off a good chunk of these as startup fees.

14. What should you name an LLC?

When naming your LLC, consider the following:

• Uniqueness: Your state requires a name that hasn't been registered before. Think of something unique to you or your business.
• Relevance: Choose a name that reflects your business's services or products.
• Flexibility: If the name you want isn't available, you can file a DBA (Doing Business As) to operate under a different name.

15. Can I live in a different state than my LLC?

Yes, you can live in a different state than your LLC. However, you will need to register your LLC as a foreign entity in the state where you reside and conduct business. This ensures compliance with local regulations and tax laws.Depending on the state, there may be additional foreign entity taxes. 

16. What is an S corporation?

An S-Corporation, commonly known as an S-Corp, is a type of corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. This election with the IRS allows S-Corps to cut the amount of self-employment tax that the owner pays on their income. In addition, S Corps avoid the double taxation that C-Corporations experience, where the corporation itself is taxed and then shareholders are taxed again on dividends.

17. How do you start an S corporation?

To start an S-Corporation, follow these steps:

• Form an LLC: Begin by incorporating your business as an LLC.
• File Form 2553: Submit Form 2553 to the IRS to elect S-Corp status. This must be done within two months and 15 days after the start of the tax year in which the election is to take effect.
• Open a Business Bank Account: Keep your personal and business finances separate.
• Define Reasonable Compensation: Determine a reasonable salary for yourself as an employee of the S-Corp.
• Take Advantage of Corporate Benefits: Utilize benefits like health insurance and retirement plans.

18. Can an LLC be an S corporation?

Yes, an LLC can elect to be taxed as an S-Corporation. This involves filing IRS Form 2553 after setting up your LLC. By doing so, you can potentially save on self-employment taxes and enjoy other benefits associated with S-Corp status.

19. Does an LLC S corp get a 1099?

Typically, S-Corporations, including LLCs taxed as S-Corps, do not receive 1099 forms unless there are specific circumstances. This is because S-Corps are separate legal entities, not individuals or partnerships.

20. How do I know if my LLC is an S corp or a C corp?

An S corp is capped at having no more than 100 shareholders. C corps, on the other hand, have no limit to the number of shareholders they can have. C corps must also have a board of directors that oversees management and meets regularly. As a result, C corporations tend to have more overhead and layers of bureaucracy.

To determine if your LLC is taxed as an S-Corp or a C-Corp, you can check the following:

• IRS Form 2553: If you filed Form 2553 with the IRS and it was accepted, your LLC is taxed as an S-Corp.
• Tax Returns: Look at your tax returns. If you file Form 1120S, your LLC is taxed as an S-Corp. If you file Form 1120, it's taxed as a C-Corp.
• IRS Confirmation: You should have received a confirmation letter from the IRS if your S-Corp election was approved.

21. What are the benefits of an S corp vs. LLC?

An S-Corporation offers several benefits over a standard LLC:

• Tax Efficiency: S-Corps can save you on self-employment taxes. You only pay payroll taxes on a reasonable salary you pay yourself, not on the entire net income.
• Automated Benefits: Access to health insurance and retirement plans through automated payroll, potentially reducing taxable income.
• Asset Protection: Enhanced separation between personal and business finances, offering robust protection against audits and legal issues.
• Enhanced Credibility: Operating as an S-Corp can boost your business's credibility.
• Audit Defense: Lower likelihood of being audited compared to Schedule C filers, with CPA-backed audit defense.
• Corporate Benefits Access: Enjoy benefits typically reserved for larger corporations, like retirement plans.
• Maximized Retirement Contributions: Maximize your retirement contributions, enhancing your future financial security while minimizing current tax liabilities.

22. What is a disadvantage of S corporations?

One disadvantage of S-Corporations is the increased complexity in management compared to a sole proprietorship or a standard LLC. Here are some specific challenges:

• Compliance Requirements: S-Corps have more stringent compliance rules, including running a reasonable compensation payroll, filing articles of incorporation, and annual filings.
• Tax Filings: You need to file an annual corporate tax return (Form 1120S) and issue K-1s to owners.
• Bookkeeping: Excellent bookkeeping practices are essential to maintain compliance.
• Ownership Restrictions: S-Corps have limitations on ownership, such as a maximum of 100 shareholders and only one class of stock.
• State-Specific Rules: Some states have additional regulations and fees for S-Corps.

These complexities can add to the administrative burden and costs, which might outweigh the tax benefits for some small business owners.

Curious if an S Corp is right for you?

Try the Lettuce Tax Calculator to see how much more you can take home each year.

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23. What is a reasonable salary for an S corp?

A reasonable salary for an S-Corp owner is one that you would pay someone else to perform the same job. The IRS considers several factors to determine if your salary is reasonable:

• Industry Averages: What others in your industry are paid for similar work.
• Experience and Education: Your level of experience and education.
• Skill Level: The skills required for the job.
• Time Spent: The amount of time you spend working for the company.
• Company's Net Income: The overall profitability of your business.

It's important to set a salary that aligns with these factors to avoid IRS scrutiny.

24. Can my S corp pay my personal taxes?

No, your S-Corp cannot pay your personal taxes directly. However, as an S-Corp owner, you can pay yourself a salary, and the S-Corp can withhold taxes from your paycheck. Additionally, you can take distributions from the S-Corp, which you will report on your personal tax return.

25. Can an S corp be a holding company?

Yes, an S-Corp can serve as a holding company for your other businesses. This structure can offer benefits such as asset protection, simplified management, and potential tax advantages, like the ability to file consolidated tax returns if the holding company owns 80% or more of the subsidiaries.

26. Does S corp income affect Social Security benefits?

Yes, S-Corp income can affect your Social Security benefits. Since S-Corp owners only pay self-employment taxes on their salary and not on distributions, this can reduce the amount paid into the Social Security program over time, potentially impacting your benefits at retirement.

27. When are S corp taxes due?

If your S corp follows the calendar year, its taxes will be due March 15. If you file for an extension, the extended deadline is September 15th.

One important note to keep in mind: While S corps aren’t subject to federal taxes, different states treat S corps differently — some follow federal guidelines and some ignore them and tax S corps. That’s another reason to diligently choose where to locate your business.

It’s important to note you still need to file your personal taxes by the April 15th deadline. 

28. How do you close an S corp?

Here’s how to close an S-Corporation:

• Close the books: Pay any bills, debts, and taxes. Ensure funds are set aside for unplanned future expenses and final payroll.
• Notify customers and collect payments: Inform your customers and collect any outstanding payments.
• Close accounts: Close all business bank accounts, utilities, and vendor accounts.
• Cancel policies and registrations: Cancel any insurance policies, licenses, permits, and registrations held in the company name.
• File final tax returns: File the final tax return with the IRS. This includes Federal Form 941 or 944, Federal Form 940, Form W-3 and W-2 for each employee, Form 8027 if employees receive tips, and Form 5500 if employee benefits were provided.
• Divide remaining assets: Distribute any remaining assets to the member(s).

29. What is a PLLC?

A PLLC is a Professional Limited Liability Company. It is a business structure designed for professionals — think doctors, lawyers, therapists. The benefits are that these types of professionals can protect their personal assets from any debts or taxes their business owes. There are some catches, though. Just like with LLCs, PLLCs can face personal liability if their owners mix personal and business funds. Also, not everyone who considers themselves a professional is entitled to form a PLLC. The requirement varies by state, though typically if your work requires a license to perform it, there is a good chance you can create a PLLC.

30. Can independent contractors deduct business expenses?

Yes, independent or self-employed workers can deduct business expenses. Some common expenses include a home office, health insurance costs, a car, meals, and business travel. There are, however, requirements that must be met to secure these deductions — for instance, if you’re trying to deduct a meal with a client, it will likely be rejected if it was very expensive and connected to other events not tied to your business. Before you file your taxes, be sure to review any business expenses you hope to deduct to make sure they qualify.

31. How do you avoid paying taxes as an independent contractor?

As an independent contractor, you can't avoid paying taxes, but you can reduce your tax burden by:

• Utilizing self-employment deductions
• Keeping track of all business-related expenses
• Considering a change in business structure, like forming an LLC and electing S-Corp status
• Taking advantage of write-offs
• Filing multiple returns or taking additional credits where appropriate

32. Can I switch from a sole proprietorship to an S corp?

Yes, you can switch from a sole proprietorship to an S corp, typically by filing IRS Form 2553 after incorporating your business.

33. If I do so, will I need a new W9?

Once you are set up with your LLC, S corp, and a new EIN, you will need to send your clients a new W9. This W9 will indicate that you are an S corp, and will use your EIN number instead of your Social Security number. You can get a W9 from the IRS.

34. What do I need to know about choosing a business name?

Choosing a business name can feel stressful, but it doesn't have to be. Here's what you need to know:

• Uniqueness: Your state requires that the name you choose hasn't been registered before. So, think of something unique to you or your business.
• Multiple Options: Lettuce asks you to choose several names for your business to ensure one of them is available.
• DBA Option: If the name you register isn't the one you wanted, you can file a form with your state to create a DBA (Doing Business As) name. This allows you to operate under a different name while keeping your LLC's legal name.

35. What are the other main tax benefits of operating as an S corp?

The main tax benefits of operating as an S Corp include:

• Reduction in Social Security and Medicare Taxes: Instead of paying 15.3% on your total income, you only pay this tax on a portion of your income, saving you thousands.
• Pass-Through Income Status: You won’t pay federal income taxes at the corporate level.
• Additional Deductions and Credits: You can be eligible for certain tax deductions and credits, such as the Qualified Small Business Stock deduction.
• Retirement Contributions: You can contribute to retirement plans like a 401(k), which can offer higher contribution limits than those available to sole proprietors.
• Asset Protection: S Corps provide liability protection for shareholders. These benefits can significantly reduce your overall tax liability and provide more financial flexibility.

36. My partner and I both consult. Should we have a separate S corps

It depends. If you have two separate businesses with different customer bases and subject matter, you should open two separate companies (LLCs) and make an S-election separately for each. This approach helps protect each business and maximizes their value.

However, if both of you provide the same type of consulting to the same type of customers in the same subject matter, you can open one company (LLC), make just one S-election, and have both spouses be owners. Alternatively, one spouse can be the owner and the other a contractor/employee of the business.

37. I missed the quarterly tax deadline. Now what?

Missing a quarterly tax deadline can result in penalties and interest charges. Here’s what typically happens:

• Late Payment Penalty: The IRS may impose a penalty for late payment of estimated taxes. The penalty is calculated based on the amount of underpayment, the period of underpayment, and the interest rate for underpayments. The rate is usually the federal short-term rate plus 3%.
• Interest Charges: Interest will accrue on the unpaid amount from the date the payment was due until the date it is paid. The interest rate is set quarterly and is the federal short-term rate plus 3%.

38. How do I estimate quarterly taxes?

Estimating quarterly taxes involves calculating your expected income, deductions, and credits for the year and then making four equal payments throughout the year. Here’s how to estimate and pay your quarterly taxes:

• Estimate Your Annual Income
  • Calculate Gross Income: Include all sources of income such as wages, self-employment income, interest, dividends, rental income, etc.
  • Adjust for Deductions: Subtract any deductions you expect to qualify for, such as the standard deduction or itemized deductions like mortgage interest, charitable contributions, and medical expenses.
• Determine Your Taxable Income
  • Adjustments: Subtract any adjustments to income such as contributions to a traditional IRA, student loan interest, and health savings account (HSA) contributions.
• Calculate Your Annual Tax Liability
  • Tax Rates: Apply the appropriate federal tax rates to your taxable income. You can find the current tax rates on the IRS website.
  • Credits: Subtract any tax credits you expect to qualify for, such as the Child Tax Credit or the Earned Income Tax Credit. 
• Divide by Four
  • Quarterly Payments: Divide your total estimated tax liability by four to determine your quarterly tax payments.
  • The payment for the third quarter is due on September 15. Future payments are due January 15 of the following year for the final quarter. Use the IRS Direct Pay system or the Electronic Federal Tax Payment System. You can also send a check or money order with Form 1040-ES voucher to the appropriate IRS address.

39. Can S corps deduct charitable contributions?

Yes, S Corporations can make charitable contributions, but the way these contributions are deducted is different compared to how a C Corporation handles them. Here's how it works:

• Pass-Through Entity: An S Corporation is a pass-through entity, meaning its income, deductions, credits, and other tax attributes pass through to its shareholders. The corporation itself does not pay taxes; instead, the shareholders report the income and deductions on their personal tax returns.
• Reporting Contributions: Charitable contributions made by an S Corporation are reported on Schedule K-1 (Form 1120S), which is given to each shareholder. The amount of the charitable contribution is listed as a separately stated item on the K
• Shareholder Deduction: Shareholders can then deduct the charitable contributions on their personal tax returns, subject to the usual limitations on charitable contribution deductions for individuals. Generally, these limitations are a percentage of the shareholder’s adjusted gross income (AGI).

40. How should S corps report charitable contributions on their tax returns

Here's how S Corporations should report charitable contributions on their tax returns:

• Record the Contribution: Charitable contributions made by the S Corporation should be recorded in the corporation’s accounting records as an expense.
• Form 1120S - U.S. Income Tax Return for an S Corporation:
  • Line 12 (Other Deductions): Include the charitable contributions on this line as part of the total other deductions. However, these contributions need to be itemized on Schedule K and passed through to the shareholders.
• Schedule K (Form 1120S):
  • Line 12a: Enter the total amount of charitable contributions made by the S Corporation during the tax year on this line of Schedule K
• Schedule K-1 (Form 1120S):
  • Box 12: Enter each shareholder’s pro-rata share of the charitable contributions in this box of Schedule K-1 using code A for charitable contributions.

This process ensures that the deduction for charitable contributions is passed through to the shareholders, who can then report it on their personal tax returns.

41. How long does it take to receive a tax refund?

The time it takes to receive a tax refund can vary depending on how you file your return and whether you choose direct deposit or a paper check. Here are the general timeframes:

• Filing Electronically:
  • Direct Deposit: Typically within 21 days from the date the IRS accepts your return.
  • Paper Check: About 4 to 6 weeks from the date the IRS accepts your return.
• Filing by Paper:
  • Direct Deposit: About 6 to 8 weeks from the date the IRS receives your return.
  • Paper Check: About 6 to 8 weeks from the date the IRS receives your return.
• Amended Returns:
  • Up to 16 weeks or longer.

42. Are there any ways to expedite the tax refund process?

Yes, there are several ways to expedite the tax refund process, and you can check the status of your refund using the Where’s My Refund tool on the IRS website. Here are some tips to help you receive your refund as quickly as possible:

• E-File: Filing your tax return electronically is the fastest way to get your refund. The IRS processes e-filed returns more quickly than paper returns.
• Use Tax Software: Use reputable tax software or an online tax service to file your return electronically. Many of these services offer error-checking features that can help reduce the likelihood of mistakes.
• Choose Direct Deposit: Opt for direct deposit instead of a paper check. Direct deposit is faster and more secure. It can reduce your wait time by several weeks.
• Split Refund: You can split your refund into up to three different accounts, such as checking, savings, or retirement accounts, using Form 8888.
• Check for Errors: Double-check your return for any errors or missing information. Common mistakes like incorrect Social Security numbers, misspelled names, or math errors can delay processing.
• Complete All Required Forms: Make sure to include all required forms and schedules with your return.
• Respond Promptly to IRS Requests: If the IRS requests additional information or documentation, respond as quickly as possible to avoid delays.
• Verification: If your return is selected for identity verification, follow the instructions provided by the IRS promptly.
• Early Filing: File your return as early as possible. Early filing can help you avoid the rush and potential delays that can occur during peak tax season.