Income Taxes for Sole Proprietors

Operating as a sole proprietor is the simplest way to establish a business. No separate entity is created, like a corporation or a partnership. No legal agreements are needed to get started.

Income taxes for sole proprietors? Not so simple.

Sole proprietors are individuals in business for themselves. They have not incorporated and have no partners or other owners. Business income and expenses are reported on Schedule C, “Profit or Loss from Business,” and filed with the business owner’s individual income tax return. A separate Schedule C (or C-EZ, the short form) must be filed for each business operated by the sole proprietor.

Net business profits are also subject to the employer and employee portions of the Medicare and Social Security taxes (i.e., FICA). This tax is calculated by completing IRS Schedule SE, “Self-Employment Tax.” Any self-employment taxes are paid to the IRS with the business owner’s individual income tax return.

Sole proprietors with employees must follow the same reporting, tax withholding, and tax remittance rules as any other employer. This includes quarterly and annual wages reporting (e.g., IRS Form 941 or 942) and federal unemployment tax (Form 940).

Additional tracking and reporting is required if the business uses contactors (i.e., IRS Form 1099). Businesses with assets that are used for a year or more may need to file additional forms to depreciate the cost.

State filing requirements vary. Every sole proprietor should check with his or her particular taxing jurisdiction for details and instructions.

Taxes can be complicated. Knowing the right forms and when to file them can be overwhelming. Those complications are compounded when you start a business, even as a sole proprietor. Consulting a qualified tax professional helps business owners keep it all straight, minimize errors, and leave more time for managing the business.