The IRS treats the owner of a sole proprietorship and the business as a single entity. Instead of paying a 21% corporate tax rate, your sole proprietorship tax rate is based on your personal income tax bracket. Sole props file an annual tax return on April 15 but may be subject to other tax filings.
If you need help keeping track of your business and personal finances, we recommend QuickBooks Self-Employed (QBSE). You can track all of your business and personal income and expenses in QBSE, use the app to track your mileage, and file and pay your estimated taxes, self-employment taxes, and your income taxes all within the software! You can save up to 50% off QuickBooks Self-Employed + TurboTax Self-Employed. Plans start at only $12 per month.
How Sole Proprietorship Taxes Work
As discussed, sole props are not considered to be separate entities from their owners like corporations. With that said, all business income and expenses are reported along with IRS Form 1040, the Individual Income tax return. One of the major advantages of being a sole prop is that the tax rate on which your profits are taxed is based on your personal income tax rate and not a corporate tax rate, which is generally 21%.
In addition to reporting income and expenses from all business activity, you may also need to complete additional tax forms to report payments made to contractors and employees, and sales taxes collected on products sold.
What Sole Proprietor Tax Forms You’ll Commonly Use
There are several sole proprietorship tax forms that must be completed to report and/or pay sole proprietor taxes. You will report both personal and business taxes on Form 1040, profit/loss on business, self-employment taxes, miscellaneous income, estimated taxes, sales tax on certain products, and payroll taxes if you have employees.
Listed below are eleven common sole proprietor tax forms you may be required to file:
1. Form 1040: Individual Income Tax Return
Form 1040 is the standard federal income tax form that most individuals will use to report their gross income. Unlike partnerships and corporations, sole proprietorship taxes are not filed on a stand-alone tax form. Instead, you will include your business income and expenses on your personal 1040 via additional schedules like Schedule C. As a result, the amount you pay in sole proprietorship taxes depends not only on your business financials, but also on the personal income you report and deductions you can take.
This form is due each year on April 15th. If this date falls on a weekend or a holiday, the form is due on the next business day. Download Form 1040 so that you can see what information is required to complete this form.
2. Schedule C: Profit or Loss from a Sole Prop Business
Schedule C is a year-end tax form used to report all the income and expenses of a sole proprietor within the tax year. This includes sales from products and/or services, and ordinary business expenses like office supplies, rent, utilities, taxes, employee wages, contract labor, and cost of goods sold.
The bottom line net income or loss that is calculated on Schedule C is reported on your personal tax Form 1040. Schedule C must be filed along with Form 1040 by April of the following year you are reporting on. For step-by-step instructions on how to complete Schedule C, check out our IRS Schedule C guide. Download Schedule C so that you can see what information is required to complete the form.
3. Schedule C-EZ: Net Profit from a Sole Prop Business (Short Form)
If you meet certain requirements, such as you had less than $5,000 in business expenses and you use the cash accounting method, you may qualify to file Schedule C-EZ, which is the “short form” of Schedule C (above). Similar to Schedule C, you will need to report all income and expenses for your sole prop on Schedule C-EZ.
If you meet the following nine requirements, you can file Schedule C-EZ instead of Schedule C:
- Your business expenses do not exceed $5,000
- Your business uses the cash accounting method
- You did not carry inventory anytime during the year
- You did not have a net loss from your business—you earned a profit
- You had only one business that was a sole proprietor, qualified joint venture, or statutory employee
- You had no employees during the year
- You do not qualify for the home office tax deduction
- You do not have prior year unallowed passive activity losses for this business
- You are not required to file Form 4562, Depreciation and Amortization, used to deduct depreciation for fixed asset purchases made during the year
You can download a free copy of IRS Schedule C-EZ for more details.
4. Schedule SE: Self-Employment Tax
The income earned by sole props is considered self-employment income. If your net earnings is $400 or more, you are required to pay self-employment taxes. Self-employment taxes consist of Social Security and Medicare taxes. For 2017 and 2018, you will pay between 15.3% and 16.2% in self-employment tax.
Self-employment taxes are due four times each year: on the 15th of April, June, September, and January (of the following year). Check out our Self-Employment Taxes guide for more information on how self-employment taxes work. Download Schedule SE so that you can see what information is required to complete the form.
5. Form 1099-MISC: Miscellaneous Income
If you paid an independent contractor anytime during the tax year, you will need to complete a 1099 form for any individual that you paid $600 or more to within the calendar year (January through December). While there are no taxes due for this form, you must provide the contractors with this form no later than January 31 of the following year.
For example, any payments made between January 1 and December 31, 2018 must be reported on a 1099 form no later than January 31, 2019. To learn more about 1099 form requirements, including when and how to file, check out our 1099 Reporting Tax Guide. Download Form 1099-Misc so that you can see what information is required to complete the form.
6. Form 1040-ES: Estimated Tax for Individuals
Estimated taxes is a method of paying taxes on income that is not subject to withholding tax. Some examples include income from self-employment, business earnings, interest, rent, dividends, and other sources. The IRS requires estimated taxes to be paid on a quarterly basis in four equal installments due April 15, June 15, September 15, and January 15 (of the following year). Download Form 1040-ES so that you can review the information required to complete the form.
To calculate your estimated tax payments, you need to add up your total income, deductions, credits, and tax payments. If you use an accounting software like QuickBooks Self-Employed (QBSE), it will calculate your estimated tax payments for you so you don’t have to do it manually. You can also submit electronic payments and Form 1040-ES right within QBSE!
7. Form 941: Employer’s Quarterly Federal Tax Return
Form 941 is a quarterly tax form that tracks FICA (Social Security and Medicare) tax payments made by employers throughout the year. If you did not pay employees during the year, you will not complete this form. Employers are required to remit payment either on a monthly or semiweekly basis, and all employers file Form 941 on a quarterly basis.
In general, employers must file Form 941 on April 30, July 31, October 31, and January 31 (of the following year). For example, on January 31, 2019, you will be paying taxes for the last quarter of 2018 (October 1 through December 31, 2018). Check out our Form 941 Instructions Guide for more information, including when and how to file. Download Form 941 so you can see what information is required to complete the form.
Form 940 is the annual tax form that tracks federal unemployment tax payments made by employers throughout the tax year. Similar to Form 941, if you did not pay employees during the year, you will not complete this form. Employers are required to pay a tax rate of 6% on the first $7,000 that each employee earns. However, employers are also subject to state unemployment taxes (SUTA), which vary by state.
If you pay your SUTA taxes on time, you can reduce your FUTA taxes down to 0.6%, allowing you a maximum credit of 5.4%! Form 940 must be filed annually for the previous year, which means FUTA taxes paid between January 1 and December 31, 2018 must be filed no later than January 31, 2019.
9. W-2 Form: Wage and Tax Statement
A W-2 form is a year-end form that provides an employee’s total income for the year, including salary, wages, and tips. It also includes total contributions made to healthcare and 401(k) plans as well as income tax, Medicare, and Social Security tax deductions. As an employer, you are required to provide all employees with this document no later than January 31 of the following year. If you don’t have employees, you do not need to complete this form.
For example, W-2 forms for January 1 through December 31, 2018 must be issued to employees no later than January 31, 2019. For more information on W-2s, check out our W-2 guide. You can download Form W-2 here.
10. W-3 Form: Transmittal of Wage and Tax Statements
Form W3, known as the Transmittal of Wage and Tax Statements, is a summarized total of all W-2 forms for the year. This will include total wages, tips, salaries, and employee contributions to healthcare and 401(k) plans, as well as total income taxes, Social Security, and Medicare taxes withheld for all employees. Download Form W-3 to see what information is required.
11. Sales Tax
If you sell products that are subject to sales tax, you are responsible for calculating, collecting, reporting, and remitting that sales tax to the appropriate state and local tax authorities. Each state will require you to file a Sales and Use tax return along with your sales tax payment.
The due dates and tax forms will vary from state to state. You can use our map to find your state tax agency to learn about the requirements in the states where you collect sales tax. Be sure to check out our Sales & Use tax guide to learn more about how sales taxes work.
Pros and Cons of Being Taxed as a Sole Prop
From a tax perspective, there are several pros and cons of being taxed as a sole proprietor versus being taxed as an LLC or a Corporation. On the pro side, you don’t have to worry about double taxation and no annual reports or filings. The biggest con is that you are personally responsible for all business expenses and debts, including all tax liabilities.
Pros of Being Taxed as a Sole Prop
Listed below are three benefits (pros) of being taxed at a sole proprietorship tax rate:
1. Taxed at Ordinary Income Tax Rate
As a sole proprietor, you are not subject to the 21% corporate tax rate. Instead, you report your business income on your personal tax return, and it is taxed at your ordinary income tax rate.
2. No Double Taxation
A sole proprietor is not subject to double taxation, like a C-Corp. C-Corps are taxed on profits made at the company level and then again when distributions are made to shareholders in the form of dividends. This can result in as much as 41% in taxes paid on business profits!
3. Eligible for Sole Proprietorship Tax Deductions
Sole proprietors are eligible for a tax deduction on any expense that is considered “ordinary and necessary” according to the IRS. This includes, but is not limited to, the following common sole proprietorship tax deductions:
- Home Office Deduction – If you have an office setup in your home, you may be eligible to deduct rent, utilities, telephone, and other expenses for the portion of the home that is used for business. Check out our home office tax guide to learn more.
- Health Insurance Deduction – Another sole proprietorship tax deduction you may be eligible for is the cost of health insurance for yourself, your spouse, and any dependents. Your deduction is limited to the amount of your taxable income; this means that if you take a loss in your business, you cannot take this deduction.
- Section 179 Deduction – For the 2017 tax year, sole props can deduct up to $500,000 of qualifying property and equipment purchases in the year of purchase. For the 2018 tax year, Sec 179 doubles to $1 million. Check out our Section 179 deduction guide to see if you qualify and what sole proprietorship tax form you must complete to claim the deduction.
- Vehicle Deduction – If you use your vehicle to travel to client offices or run errands for your business, you can deduct the mileage driven for business or a portion of your actual vehicle expenses like gas, repairs, and license fees. Our extensive vehicle deduction guide includes information on how to qualify for this sole proprietorship tax deduction and how to claim it on your tax return.
Cons of Being Taxed as a Sole Prop
Listed below are three cons of being taxed at a sole proprietorship tax rate:
1. Personal Liability
The major downside to being taxed as a sole prop is that you are personally responsible for all debt incurred by the business. For example, if a customer was harmed by your product or service, you will be responsible for any lawsuits that are filed against your business. Other obligations that this applies to are:
- Unpaid state and federal taxes on business profits
- Unpaid sales tax
- Unpaid payroll taxes, including unemployment, Social Security, and Medicare
- Interest, penalties, and other costs associated with unpaid tax liabilities
2. Not All Businesses Are Eligible to File Sole Proprietorship Taxes
A sole proprietorship was designed for a single business owner. As a result, if you decide to take on one or more partners or sell interest in your business to raise capital, you will not be eligible to file sole proprietorship taxes. Instead, you will have to apply for LLC, S-Corp, or C-Corp status.
3. Requires You to Carefully Track Business and Personal Expenses
Like most business entities, you must separate your personal and business expenses. However, as a sole prop, it’s easy to forget that your business is a separate entity, even though it is not taxed as such. Accounting software like QuickBooks Self-Employed was designed to help you organize and track your personal and business expenses separately.
When You Should Consider Alternatives to Sole Props
While taxes are easier for a sole prop than other entities, there may be valid reasons why you should consider a different structure, even if it results in higher taxes. As discussed, you are personally liable for all expenses and debts incurred by your business as a sole prop. However, if you switch to an S-Corp, LLC, or C-Corp, your personal assets are protected.
Listed below are three types of corporate business entities and who each is right for:
An S-Corp is a “lite” version of a C-Corp. You have to first become a C Corporation and then file for subchapter S-Corp status and meet all of the requirements. Similar to sole props, an S-Corp is a pass-through entity. This means that its shareholders report any distribution of profits on their personal tax returns, which is subject to their ordinary income tax rate and not a corporate tax rate.
We spoke with our tax expert, Shauna Wekherlien, and here is what she had to say about when you should consider switching from a sole prop to an S-Corp status:
I recommend moving to an S-Corp from a sole proprietorship when your net profit is over $50,000/year on a consistent basis. The additional costs and headaches of having an S-Corp, plus its tax savings, will outweigh the simplistic and easier sole proprietorship taxes.
To learn more about S-Corp taxes, including when and how to file, check out our S-Corp Tax Guide.
An LLC, Limited Liability Corporation, is a pass-through entity like a Sole prop and an S-Corp. This means that members of an LLC carry their business profits over to their personal income tax returns and are subject to their ordinary income tax rate—not a corporate rate. To learn more about LLC taxes, including when and how to file, check out our LLC Tax Guide.
3. C Corporations
Unlike Sole props, S-Corps, and LLCs, a C Corporation is recognized as a business entity and taxed separately from its shareholders (owners). The downside to a C-Corp is that it is subject to double taxation. First, the business pays taxes on the profits earned, and any profits passed down to business owners in the form of dividends is taxed again as ordinary income on the shareholder’s personal income tax return.
Frequently Asked Questions (FAQs) About Sole Proprietorship Taxes
Below are a few of the frequently asked questions regarding sole proprietorship taxes. If you don’t see your question listed, head over to the Fit Small Business forum and post your question there. We have a number of small business owners like yourself as well as CPAs, attorneys, and other professionals who will promptly respond to your question.
Some of the most frequently asked questions about sole proprietorship taxes are:
Do Sole Props Have to Pay Quarterly Taxes?
Yes, sole props are required to pay estimated taxes each quarter. Estimated taxes are calculated on income that is not subject to withholding, which includes:
- Self-employment income
- Business earnings
- Interest Income
- Rental income
- Dividends and other sources
Do Sole Props Pay Sales Tax?
Yes, sole proprietor taxes include sales tax on products that are subject to sales tax. You must collect the sales tax from your customers, remit sales tax payments to your state, and file a sales tax return. Due dates and sales tax forms vary by state.
What Tax Forms Do I Need to File as a Sole Prop?
There are several tax forms you may need to file as a sole prop. You will report your business income and expenses on Schedule C of your Form 1040. Some of the forms include reporting your income/loss on your business, payroll taxes if you have employees, and 1099 tax forms for payments to contractors.
Below is a list of the most common tax forms that you may need to file as a sole proprietor:
- Form 1040
- Schedule C
- Schedule C-EZ
- Schedule SE
- Form 1099-MISC
- Form 1040-ES
- Form 941
- Form 940
- W-2 Form
- W-3 Form
- Sales Tax
Do Sole Props Get Tax Refunds?
Yes, as a sole prop you can get a tax refund if the total amount of your tax deductions plus business credits exceeds your gross income for the year. The refund that you will receive will be part of any refund that you get personally when you file Form 1040. It will not be a separate refund since as a sole prop, you will report both your personal and business income and expenses on Form 1040.
Do You Send a 1099 to a Sole Prop?
Yes, you are required to send a 1099 to any individual or business that you have paid $600 or more to during the year. This includes, but is not limited to, professional services such as legal and accounting, plumbing services, virtual assistants, IT support, and website developers. However, you are not required to send a 1099 form to any business that is incorporated. This includes S-Corps, C-Corps, and LLCs that are treated like an S-Corp or C-Corp.
How Much Can You Make on a 1099 Before You Have to Claim It?
If you are self-employed, you must claim any income of $400 or more on your tax returns. To do so, you will complete Schedule SE to report self-employment income and file it along with Form 1040.
Do Sole Proprietors Need an EIN?
An EIN, or employer identification number, is used by the IRS to identify taxpayers. Even though sole proprietor taxes are reported on your personal 1040 tax return, in some cases, your sole prop will also need an EIN, such as if you hire employees.
Now that you know how sole proprietor taxes work, the most common tax forms a sole prop is required to file, some of the pros and cons of being taxed as a sole prop, and when it may be time to switch to another entity, it’s time to sign up for QuickBooks Self-Employed so you can get organized.
QuickBooks Self-Employed will make tax time much easier because all of your income and expenses will be in one place. You can easily run reports that will tell you how much you need to pay in taxes and you can also manage your finances on the go by downloading the mobile app. You can save up to 50% off QuickBooks Self-Employed + TurboTax Self-Employed. Plans start at only $12 per month.