Help a newbie - entering sole proprietor income

What kind of LLC is it?  Did you elect to be an S corp? 

If you have a Single Member LLC that is not an S corp it is a disregarded entity and you gpfile it on Schedule C in your personal tax return.  You do not expense the amounts you paid yourself.  

Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.

You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

The SE tax will be included in your tax due or reduce your refund.  It is on the 1040 Schedule 2 line 4 which goes to 1040 line 23.  The SE tax is in addition to your regular income tax on the net profit.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 15 which flows to 1040 line 10.

We have several items here to discuss as you listed above.  First as a single member LLC, it looks like you do understand that you need to file a Schedule C.  On the Schedule C list the LLC's name and TIN even though it is considered a disregarded entity.

Next on the list is your Owner's Draw.  No the $80K you listed is not what you claim as income from the Schedule C.  The income that flows to the return for tax purposes is the NET income shown on Line 31 of the Schedule C.  Whether you take $1 or $100,000 as a draw, the taxable income from the Schedule C is the amount that shows on Line 31.

Your Quarterly estimates, are based on your total income from all sources which includes the net income from your Schedule C.

Your Self-Employment tax is equivalent to your Social Security and Medicare tax.  When one works for an employer they have SS and Medicare withheld the employer also pays an equal amount.  Your are your own employer so you have to pay both parts, which is based on 93.25% of the net of your Schedule C.

The last item, the health insurance deduction.  I would be wary of taking this if it is not specifically spelled out in any agreement. 

@bluesjumper 

This is helpful. To summarize what you said, my Schedule C should capture my gross receipts of my LLC, and my quarterly estimated taxes have been paid correctly against these gross receipts.

One last question regarding the owner's draw. As my LLC is paying myself, where does the payroll tax withholding get captured? I thought one benefit of single member LLC was to save on payroll taxes by only getting taxed on the owner's draw amount.

Your last question requires a bit of clarification.  As a single member LLC, the IRS considers you a disregarded entity.  You pay self-employment tax on your "profit" which is the equivalent of both halves (the employer's and employee's) Social Security and Medicare tax.  You are not an employee, you are a sole proprietor.  You don't pay yourself like an employee and withhold taxes.   If you have been doing that, you need to stop.  If you did that in 2022, did you issue yourself a W-2?  As far as only paying payroll tax on your "draws", you are confusing a sole proprietorship and an S-Corp, or LLC that elected S-Corp status.

I'm an LLC with S-corp status. I have not been issuing myself a W-2. All I've been doing for 'owner draw' is to transfer some money monthly from my business account to my personal account. Forget I ever mentioned 'sole proprietorship'...my bad on the lingo/misunderstanding.

I did some research and now here is my understanding. I earn money in two ways when I own my business: Distributions passed through S-corp as an owner. These are not treated as self-employment income. And Salary, the money I pay myself as employee of the S corp. The owner draw I have been referring to is this 'reasonable salary'. 

If LLC gross revenue is $200K, salary is $80K, and distributions are $120K (I may adjust this ratio based on 60/40 rule or further market research), please clarify where in TaxAct do I enter these numbers? All I see under Business is 'General Business Income', but where to distinguish salary from distributions?

"The owner draw I have been referring to is this 'reasonable salary'."  Reasonable salary/compensation is what you must pay yourself as an employee of the S-Corp.  

If your consulting business is making $200,000, and you have no employees, $80,000 may  not be reasonable compensation.  

I can't help you with TaxAct, but I can say that it sounds like you are trying to report your S-Corp on Schedule C, as if you were self-employed.  If your not already, you need to be filing Form 1120-S.  This requires a separate business program.  For information about, and to purchase TurboTax for Business download or CD, go to:  TurboTax Business  You might want to seek to the advice/help of a local tax professional.

Sorry, I meant to say TurboTax, not TaxAct!!! I own TurboTax Home & Business (desktop). 

This article has helped me. It appears that a one-member LLC is treated as sole proprietorship for tax purposes. I just need to file schedule C for income.

So to confirm: it appears that the notion of salary vs. distributions, whereby I save on payroll taxes on the distributions, does NOT apply to me? From the article, this is a bit vague:

The current rule is that any owner who works in or helps manage the business must pay self-employment tax on his distributive share (rightful share of profits). If you actively manage or work in your LLC, you can expect to pay self-employment tax on all LLC profits allocated to you. Each member who is subject to the self-employment tax reports the amount due on Schedule SE.

My confusion: do I get to choose what my 'distributive share' is, and if yes, where do I indicate that in TurboTax Home & Business? Or is it because I'm a single member LLC using Schedule C, I do not get to choose, and must pay self-employment tax on 100% of net income?

STOP  BACK UP!  You need to prepare a separate 1120 S return, not Schedule C.  You will get a Schedule K-1 from the business return to enter into your personal 1040 return.  You probably should go to a local accountant to get it set up right the first year.

You need Turbo Tax Business.  It  is a separate program from Home & Business.  It is not available to do online or on a Mac.  And it will not do your personal 1040 return.  And you can have both TT Business and TT Home & Business (or any personal version) installed on  your computer at the same time.

You can buy the Window's version here…..

https://turbotax.intuit.com/small-business-taxes

That Nolo article does not mention Single Member LLC  S  corp at all.  S corp files a 1120 S Business return, not a personal Schedule C.  

You are correct in that a SMLLC is treated, for tax purposes, as a sole proprietor and thus, prepares a Schedule C in connection with the business.  As an LLC, you do have the option to be taxed as an S-Corp or a C-Corp; however, those tax elections involve other considerations, some of which it appears you have already researched, such as a distribution versus a wage.  If you elect to be taxed as an S-Corp, then the concept of distribution versus wage applies to you; however, you will need to justify how you characterize your income, i.e., whether a particular payment is a distribution and thus, among other things, not subject to SE tax, or a wage and subject to, among other things, SE tax.  

On your Schedule C you should enter your gross receipts--the $200,000--and also your business expenses.  Your income tax, as well as your self-employment tax (Schedule SE) are based on your net profit.  You are correct in that TurboTax will prepare Schedule SE for you and yes, you do need to pay self-employment tax and include Schedule SE with your return.  As a self-employed person, you will pay the full amount of SE tax--currently 15.3%--however, one-half of this amount will be entered on Schedule 1 to your Form 1040 as an adjustment to income.  The adjustment to income reduces the amount of your income subject to tax and TurboTax will prepare Schedule 1 for you.  

It is recommended that you pay estimated tax payments quarterly, and in an amount based on what you anticipate your net income has been for the quarter.  

Your self-employed health insurance premiums are a business deduction, but these premiums are not entered on Schedule C.  Self-employed health insurance premiums are entered on Schedule 1 as an adjustment to income.  

Regarding which TurboTax product to use, if you decide to prepare a Schedule C, then you can use TurboTax Self-Employed.  If you elect to be taxed as an S-Corp, you will need TurboTax Business, in addition to TurboTax Self-Employed (or TurboTax Home & Business) as you will need to prepare Form 1120-S. U.S. Income Tax Return for an S Corporation. 

@bluesjumper

I agree with @VolvoGirl in that we need to STOP and re-summarize a few things as the responses on this thread are all over the board and some not even consistent within the response.

• You indicate that you have a single member LLC that has elected S corporation status.
  • This means that you should have made a separate election to no longer be a disregarded entity (which is the default for a single member LLC).
  • You should have also received a confirmation letter from the IRS indicating that you are in fact to be filing as an S corporation.
• As an S corporation, you must file a form 1120-S.  This form is available in TT Business which is a separate software package. You do not prepare a Schedule C.
  • As part of the 1120-S, you will receive a Schedule K-1.
  • You will then use the information on the K-1 to complete your personal tax return; which is done in a separate software package.
• S corporations are highly scrutinized by the IRS.  As an employee, you must pay yourself a reasonable wage (W-2).  There is no definition of reasonable as it depends on the facts and circumstances of your business.
  • Paying yourself a wage, means that the S corporation will need to complete the necessary payroll tax forms and remit the respective entity taxes withheld to the appropriate governmental entity.
  • A draw is not the same as a wage.  A draw is nothing more than just a distribution of cash to the shareholder.  The taxation of a distribution is determined at the end of the year and is based on the shareholder's tax basis; which you are required to maintain.  This draw / distribution is reported on the K-1.
  • There is a newer form (form 7203) that will be completed along with the form 1120-S.
• Since you are not preparing a Schedule C, you should not have any SE Tax.
• When you input the information from the K-1 into your personal tax return, you will pay tax on the net figures from the K-1; ordinary income, etc.
  • TT will put the K-1 amounts in the correct area of your personal tax return
• As you can see, preparing an S corporation tax return can be difficult.  Based on the type of questions being asked, I believe it is in your best interest to meet with a tax professional to provide guidance and get you started in the right direction.

Apologies to everyone for the confusion. I clearly have been confused, and the various answers prompted me to do further research and straighten everything out.

I can definitively confirm that when I formed my LLC (this past summer), I kept the default 'disregarded entity' (aka sole proprietorship) status. I did not take any further action (eg file Form 2553) to get S-corp tax status.

Correct me if I'm wrong, but it appears I'm on the right track with these points:

• TurboTax Home & Business is the right product for me
• Schedule C is the correct place to enter my LLC income
• The concept of salary vs distributions applies to S-corp and has no relevance to me
• On an earlier question...I do have it in my divorce agreement to pay my ex-wife a portion of child support to cover my health insurance under her family plan, so it's OK to claim that as a deduction

After I file my taxes, I'll have to investigate if there is any benefit to obtaining S-corp tax status. Feels like saving some money on not paying payroll taxes on the distributions does not offset the other hassles and complications that come with it. Your thoughts are welcome (or I can start another thread when the time comes).

Thanks again to everyone who helped me out!