Sole Proprietor Taxes Overview
Earnings from a sole proprietorship are subject to the self-employment tax in addition to regular federal income tax. The self-employment tax is 15.3% of net earnings (2.9% above the annual maximum for Social Security).
Tax Filing and Payments
- Sole proprietors file two forms to pay federal income tax yearly: Form 1040, the personal tax return, and Schedule C, reporting business profit/loss.
- Sole proprietors make contributions to Social Security and Medicare systems called "self-employment taxes.”
- Sole proprietors must pay the entire 15.3% self-employment tax themselves, with 12.4% going to Social Security and 2.9% to Medicare.
Tax Deductions for Sole Proprietors
If you’re new to paying taxes as a sole proprietor, you may be surprised at the amount you owe in Social Security and Medicare taxes, also called self-employment taxes.
Sole Proprietorship Tax Considerations
- Sole proprietors report income on personal returns, avoiding certain business taxes larger corporations pay.
- Sole proprietors pay income tax at federal and state levels and self-employment tax towards Social Security and Medicare.
Business Setup and Tax Implications
A sole proprietorship offers the quickest business setup. Sole proprietors report taxes at individual rates on personal returns using Schedule C for business income/expenses, not a separate business return.