A sole proprietorship is a business operated by an individual owner. It is the most common business structure and the easiest to establish. In case of sole proprietorship you will have to report all your business income or losses on your personal income tax return, but the business itself will not be taxed separately. Because the sole proprietor business is not separate from the owner.
How to file a tax return in case of a sole proprietorship?
A sole proprietorship is a pass-through entity, which means it passes through to the business owner, who reports it on their personal income tax return. It reduces the paperwork.
Sole proprietors pay:
- Self-employment tax.
- Federal income tax.
- State income tax, if this applies in your home state.
- Federal and state estimated taxes.
- Sales tax, if applicable.
Federal and State Income Tax
You will need to file 2 forms to pay federal income tax for the year: Form 1040 (the individual tax return) and Schedule C (reports business profit and loss). This form shows your personal income and Schedule C is where you’ll record business income. The amount of income tax owed is based on combined income from both Form 1040 and Schedule C.
When you are self-employed, you’re responsible for paying Social Security and Medicare:
- 12.4% => Social Security tax (on up to the first $132,900 of your income).
- 2.9% => Medicare tax.
So the self-employment tax rate is 15.3%, but if your total income is >$200,000 as a single or $250,000 for married, you’ll have to pay the Additional Medicare Tax of 0.9%.
Federal and State Estimated Taxes
When you pay estimated tax, you’re paying money ahead toward what you think you’ll owe for income and self-employment tax at the end of the year. Federal and state estimated taxes are due in January, April, June and September. The first tax payment of the current tax year is in April. Filing deadlines are typically the 15th day of their respective month.
For those who sell products/services, you may need to pay sales tax. How you pay and collect this tax depends on your home state. In Texas it can be from 6.25 to 8.25%
Tax Deductions for Sole Proprietorships
Deductions can reduce your taxable income, which means owing less in taxes. For example:
- Home office deduction;
- Contributions to self-employed retirement plans;
- Individual retirement account contributions;
- Contributions to a Health Savings Account;
- Marketing expenses;
- Interest on business loans;
- Bank fees;
- Education related to the business;
- Legal and professional fees;
- Telephone and internet service;
- Business meals;
- Business use of your car;
- Taxes and licenses;
If your maximum income is $321,400 for married couples and $160,700 for single filers, you can take a pass-through deduction of up to 20% of your qualified business income if your income is within these limits, based on your filing status.