The United States tax system is set up so that you “pay as you go”; sole proprietors are expected to pay estimated income taxes, on a quarterly basis, through the year. Ideally the business owner should strive to pay only the estimated amount and have no additional taxes due at year end. If a refund is due, it means that the business has paid too much in taxes and should consider adjusting the payments in the upcoming tax year.
Businesses Pay Estimated Taxes
Taxes are not withheld from business income like they are for wage earners; instead, the IRS expects sole proprietors to calculate and pay estimated taxes if they will incur $1,000 or more in tax liability. In some cases, tax liability for the current year can serve as the basis for estimated tax payments for the next year. This is true for any income not subject to withholding; it doesn't matter if your business income is derived from selling products or services or if your business is an independent contractor with income reported on Form 1099s. Overpayments, if they happen, should be minimal; you can roll them over as part of the estimated tax for the coming year or request a tax refund.
Business Income is Bundled with Other Personal Income as a Sole Proprietor
If you work as a wage earner in addition to running your business, or your spouse does and you file joint tax returns, your employer will withhold taxes from your paychecks. Your tax returns will bundle your W-2 income with schedules for business income; you may have a refund coming if you had too much withheld from your check and you paid your estimated taxes for the business in the correct amounts.
Tax Refunds Are Money You Denied Your Business
Seeking a large refund should never be your goal. You do want to make sure you pay enough in estimated taxes and have enough subtracted from your paychecks to cover your tax liability or you may incur penalties for underpayment or under-withholding. However, getting a large refund means you tied up your own money, without earning interest, for all or part of the tax year rather than using it to improve or grow your business.
Steven Sester has written and published for others as a public relations professional since the 1970s. His areas of expertise include the fine and performing arts, home improvement, emerging technology, alternative healthcare, environmental and sustainability issues, entrepreneurship and a variety of other topics. He is a graduate of the New College program at San Jose State University.