Overview of Sole Proprietorship
A self-employed individual is a person who works for themselves. They earn income by providing services or goods to clients or businesses. Sole proprietors own and operate businesses independently. They must register their business, obtain licenses and permits, and file taxes accordingly.
Tax Considerations for Sole Proprietors
Sole proprietors must pay self-employment taxes, which include Social Security and Medicare taxes. They can claim tax deductions but are subject to a 15.3% tax rate. Tax obligations are reported on IRS Form 1040 Schedule C.
Sole Proprietorship vs Self-Employment
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Definition:
- A sole proprietorship is a formal business structure with no legal separation between the business and owner.
- Self-employment encompasses individuals working for themselves, including contractors and partners.
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Tax Implications:
- Sole proprietors pay higher taxes compared to employees, as they are subject to self-employment taxes.
- Sole proprietors and self-employed individuals have similar tax obligations but differ in business structure and legal requirements.