Sole proprietors must also pay self-employment (SE) tax, a Social Security & Medicaire tax primarily for individuals who work for themselves. SE tax is figured using Schedule SE (Form 1040). Social Security & Medicaire taxes of most wage earners are figured by their employers. The SE tax rate is currently 15.3%. The rate currently consists of two (2) parts: 12.4% for Social Security (old-age survivors and disability insurance) and 2.9% for Medicaire (hospital insurance)
CONCEPT REVIEW/ SOLE PROPRIETORS
Definition:A sole proprietorship is the simplest form of business. The owner of the business, the sole proprietor, isthe business. There’s no separate legal entity.
Formation:There are few, if any, legal formalities required to form a sole proprietorship. If the sole proprietor hiresemployees, operates a regulated business, uses a trade name, or does business in other states, there may belaws that impose duties or responsibilities.
Management:The sole proprietor makes all management decisions.
Liability:Because the sole proprietor is the sole owner, he or she faces unlimited liability. The sole proprietor facesthe legal responsibility for all losses or liabilities incurred by the business. If the business fails, the soleproprietor is personally liable for all debts to creditors.
ELECTION TO BE AN [S]CORPORATION
Corporations that meet the following criteria can elect to be taxed as S corporations:
▪ The corporation must be a domestic corporation▪ The corporation can’t be a member of an affiliated group of corporations. ▪ The corporation can have no more than 100 shareholders ▪ Shareholders must be individuals, estates, or certain trusts. Corporations & partnerships can’t be shareholders. ▪ The corporation can’t have more than 1 class of stock. Shareholders don’t have to have equal voting rights.
An [S] corporation election is made by filing Form 2553 with the IRS. The election can be rescinded by shareholders who collectively own at least a majority of the shares of the corporation. However, if the election is rescinded, another [S] corporation election can’t be made for five (5) years. Form 1120S is used to report the income, gains, losses, deductions, credits, and so on of a domestic corporation or other entity covered by an election to be an [S] corporation.