How do taxes for sole trader businesses work?

How do taxes for sole trader businesses work?

Even if a sole trader business is intended to be a simple form of company, it is, as we see it, the most difficult form of company to understand how taxes work. 

The main reason why it is difficult to understand is that taxes work so differently compared to salaries from regular employment that most people are familiar with. If you have a limited company, you deduct tax for each salary payment, and then pay that tax and the employer’s contribution the following month. In a sole trader business, you do not pay tax on your withdrawals, but you pay tax on the profit that you declare at the end of the year. 

So the money you deposit or withdraw from your company does not affect your tax. To make it easier to understand, we here provide some simplified examples of calculations.

In these examples you can e.g. see that own withdrawals and preliminary tax do not affect the taxable surplus in the company. You can also see that the preliminary tax is an advance to the tax for the year, which means that the tax payment at the end of the year will be significantly less if you pay preliminary tax. This makes it important to report a realistic expected surplus to the Swedish Tax Agency if you have a sole trader business, a trading partnership or a limited partnership. If you do not, you risk an unpleasant surprise at the end of the year if you have not kept track of the tax during the year. You can read more about this in our article “How does preliminary tax (F-tax) work?“.

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