A sole proprietorship is an unincorporated business owned by one individual. There is no separate entity for tax purposes: the business's profit is the owner's income. The IRS describes the obligations on its sole proprietorships page. A single-member LLC that has not elected corporate treatment is taxed the same way.

Income tax

Business profit is reported on Schedule C and flows to Form 1040, where it is taxed at the owner's individual rates along with other income. The owner may also qualify for the qualified business income deduction.

Self-employment tax

Net earnings from self-employment of $400 or more are generally subject to self-employment tax, calculated on Schedule SE. It covers both the employee and employer shares of Social Security and Medicare. Half of it is deductible as an adjustment to income. See self-employment tax explained.

Estimated payments

No one withholds tax from a sole proprietor's profit, so owners generally make quarterly estimated payments using Form 1040-ES. Underpayment penalties apply when payments are too small or late. See estimated tax payments for the self-employed.

Taxpayer identification

A sole proprietor without employees can usually use their Social Security number. An EIN is required to hire employees, open certain retirement plans or file excise returns, and many owners get one anyway to avoid giving out their SSN; see how to get an EIN.

Hiring employees

A sole proprietor who hires employees takes on all employer obligations: withholding, Form 941, Form 940, W-2s and state payroll accounts. Wages paid to a spouse or children have special rules; see paying family members.

Other federal returns

Depending on activity, a sole proprietor may also file information returns such as Form 1099-NEC for contractors, excise tax returns and Form 8300 for large cash payments.

The bookkeeping trap

Because there is no separate entity, sole proprietors often run business and personal spending through one account. That makes Schedule C hard to prepare and harder to defend. A dedicated business account and monthly bookkeeping solve most of the problem; see separate business and personal finances.

When to consider another structure

As profit grows, owners often consider an LLC for liability protection and possibly an S election for tax reasons. See LLC vs S corporation and our tax services.

A simple tax routine for sole proprietors

  • Weekly: record income and expenses, keeping receipts
  • Monthly: reconcile the business bank and card accounts and set aside a percentage of profit for taxes in a separate savings account
  • Quarterly: calculate and pay estimated tax using Form 1040-ES; see the IRS's estimated taxes page
  • Annually: issue 1099s to contractors where required, review the fixed asset list, and give your preparer a reconciled profit and loss statement

Growing beyond a sole proprietorship

As profit grows, owners often ask whether forming an LLC or electing S corporation status makes sense. An LLC changes legal liability but not necessarily taxes; an S corporation election changes how owners are paid. See LLC vs S corporation for the trade-offs.

Hiring

If you hire employees, you will need an EIN, payroll registration and payroll tax deposits. Our guide to running payroll for the first time explains the steps.

Keep personal records separate.

Store receipts digitally as you go.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.