Sole proprietorship tax essentials

Running a business on your own is exciting. You get to follow your dreams and be your own boss. But there’s also hard work and lots to think about – including sole proprietor taxes. Not sure if you are a sole proprietor? Don’t know where to start on sole proprietorship taxes? Take heart – we’re here for you!

Read on as we answer “what is a sole proprietorship?”, share info about sole proprietorship taxes, and dig through how to file taxes as a sole proprietor.

Table of Contents

What is a sole proprietorship?

Before we dive into to the tax nuances of a sole proprietorship, let’s first define “what is a sole proprietorship?”

A sole proprietorship is the most common structure chosen to start a business. This is likely because it’s the easiest business structure to set up. It is the default business structure for unincorporated businesses run by one owner – the sole proprietor.

As a sole proprietor, you’re entitled to all the profits of the sole proprietorship, but also personally responsible for all of the business’ losses and liabilities.

Taxes for sole proprietorships

Sole proprietorship taxes have some differences and similarities compared to other business entities.

As a sole proprietorship, your business income and your personal income are NOT separated. This means your business itself isn’t taxed as a separate entity. This is referred to as a pass-through entity – similar to a partnership.

Taxes for sole proprietorship owners are similar to other business entities in that you have the responsibility to pay all income taxes on the profits your business accumulates throughout the year – and the self-employment tax on those profits. Additionally, if the total taxes from all sources is $1,000 or more, you may have to pay quarterly tax payments. (Note: This is based on your total tax owed, not just the tax on income from your Schedule C.)

Sound daunting? We’re here to help! Block Advisors small business certified tax pros and accountants can help with the complexities of business formation, small business taxes, and bookkeeping. As a self-employed individual or small business owner, you have a lot on your plate. Our team is your team.

Tax benefits of a sole proprietorship

Are you wondering if there are tax benefits to a sole proprietorship? There are a few, which are listed here:

1 – Marginal tax rates: Your sole proprietorship income is taxed at individual income tax rates, which could be lower than corporation taxes.

2 – Avoid double taxation: As a sole proprietorship owner you avoid double taxation.

3 – Straightforward tax preparation: Without as many complex schedules and small business tax forms than other business types, tax reporting requirements may seem simpler than other business entities and structures.

How to file taxes as a sole proprietorship

Are you wondering what the steps are for filing taxes as a sole proprietorship? Learn as we walk through how to file taxes as a sole proprietorship:

First, the income generated from your sole proprietorship is taxed as your personal income. As such, you should report profit or loss of your business on a Schedule C. Then calculate and report your business’ taxable income. This schedule helps you calculate your total income using this basic formula:

  • Total Business Income – Business Expenses = Taxable Business Income

Second, the final amount on your Schedule C (part of Form 1040) transfers to your individual tax return, reported on Schedule 1. This form reports your personal income passed through from your sole proprietorship. Include your taxable business income on this form. You’ll also use information from Schedule C to calculate self-employment taxes on Schedule SE.

Last, file your Form 1040 with the IRS. Work with a Block Advisors certified small business tax pro if you want extra support that may save you time on your sole proprietorship taxes.

Can a sole proprietor have employees?

At times, clients will ask if a sole proprietor can have employees. It may seem counterintuitive, especially if you’re thinking that you’re running your business solo. However, the answer is “yes” – sole proprietors can hire employees. In fact, there isn’t a limit to the number of workers you can hire as a sole proprietorship. Before you hire employees, you should get an EIN. Learn how to get an EIN.

Then, have your employees fill out a W-4. Additionally, you should file payroll taxes for your sole proprietorship when you have employees. A Block Advisors small business payroll expert can help you navigate the payroll tax process.  

More help with sole proprietorship tax

Taxes can be complex. But Block Advisors can help. Whether it’s getting tax guidance on the nuances of business structures or helping you file your annual taxes, let us help!

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