Overview of Sole Proprietorship and Self-Employment
- Sole Proprietorship Definition: A sole proprietor is a person who owns and conducts a business on their own. It is an unincorporated business form owned and operated by one individual.
- Self-Employment Defined: Self-employment involves earning income directly from one’s own business, trade, or profession rather than as a specified salary from an employer.
Key Differences and Similarities
- Both sole proprietors and the self-employed typically use their Social Security numbers when filing taxes.
- Sole proprietors are considered self-employed as they operate their business independently.
- While both self-employed individuals and sole proprietors are similar in working for themselves, a sole proprietorship is a formal business structure while self-employment is not.
Understanding Sole Proprietorship
- Characteristics: Simple and common business form where a single individual owns and operates the entire business with no legal distinction between owner and entity.
- Advantages: Simplicity and ease of setup, with fewer regulatory compliances compared to other business forms.
Determining If You Are a Sole Proprietor
- Ownership: A sole proprietor owns and operates a business alone, earning income by providing services or goods.
- Taxation: Sole proprietors pay taxes on profits, using IRS Form 1040 Schedule C, and may require insurance for liability protection.
Clarifying Tax Responsibilities
- Sole proprietors pay both employer and employee taxes and file taxes using Schedule C, paying self-employment tax.
- There is no tax difference between being a sole proprietor and being self-employed.