Sole Proprietorship Taxes Explained: Forms and Filing Info

Working for yourself sounds simple—no chain of command, no bureaucracy, just you, your ideas, and your own way of doing things. Sole proprietors also enjoy one of the most straightforward tax treatments—but that doesn’t mean their taxes are simple.

In this guide, you’ll get a handle on some of the intricacies around sole proprietorship taxation, including how the structure is taxed, what forms you’ll need to file, and some of the essential deductions you might be missing. Whether you’re a seasoned entrepreneur or just starting your self-employment journey, understanding these sole proprietorship tax principles can help you build a sustainable financial foundation for your venture.

What is a sole proprietorship?

A sole proprietorship is a business structure where there is no legal distinction between the owner and the operation itself. The owner of a sole proprietorship—a sole proprietor—personally owns all business assets, is entitled to all profits, and is responsible for all debts, losses, and liabilities. Unlike a corporation or limited liability company (LLC), there is no distinction between the sole proprietor’s assets and the business’s assets. This means that if the sole proprietorship is sued or subject to bankruptcy, litigants or creditors can potentially lay claim to the proprietor’s personal assets.

How are sole proprietorships taxed?

A key feature of the sole proprietorship is its tax treatment. Sole proprietorships are taxed as pass-through entities, meaning business income flows directly to the proprietor’s personal tax return. Unlike corporations, sole proprietors don’t file separate tax returns for the business. This streamlined treatment eliminates the double taxation imposed on traditional corporations, first in the form of corporate taxes on business income, then to the taxes shareholders pay on distributions.

Even so, sole proprietors must still carefully track their business income and deductible business expenses in order to make sufficient estimated tax payments and maximize their deductions.

Self-employment taxes represent one of the more significant tax burdens for sole proprietors. The federal self-employment tax rate as of 2025 is 15.3%, covering both the employer and employee portions of Social Security and Medicare. Other taxes sole proprietors must pay include:

• Federal income tax. A sole proprietorship’s income is taxed at the proprietor’s personal income tax rate (10% to 37% depending on income bracket).

• State income tax. If the sole proprietor resides in a state that levies income tax, the sole proprietorship will pay state income tax on earnings. This rate varies by state, ranging from 0% to more than 13%.

• Local income tax. Some municipalities, such as New York City and San Francisco, and counties impose additional income taxes. If the sole proprietor resides in one of these places, they will also be responsible for this tax.

• Sales tax. Sole proprietorships that sell products and some services will need to pay sales tax on each transaction to the state.

• Property tax. If your sole proprietorship owns real estate, land, or any business property, you may be required to pay property taxes to the state or municipality.

• Employment taxes. In the rare case of a sole proprietorship with employees, the business must pay employment taxes, otherwise known as payroll taxes. You’ll pay half of the employees’ Social Security and Medicare taxes, while they pay the other half. (You’ll withhold it from their wages and remit on their behalf.) You may also be responsible for unemployment taxes.

• Excise taxes. Sole proprietorships operating in specific industries—like fuel or alcohol sales—may need to pay excise tax on top of sales tax.

Sole proprietorship tax forms

• Form 1040
• Schedule C
• Schedule SE
• Other tax forms

The various forms required to pay taxes in different states, counties, and cities will vary depending on where you—the sole proprietor—reside and conduct business. At the federal level, most sole proprietors are responsible for completing and filing three key forms. 

Form 1040

The IRS’s Form 1040 is the standard federal income tax form all individuals use to report their annual income to the agency, calculate tax liability or refund, and file a personal income tax return. This form includes information about a taxpayer’s income from all sources, deductions, credits, and estimated tax payments already made, ultimately determining whether additional taxes are owed or a refund is due.

Schedule C

Schedule C is the tax form filed with the IRS by the self-employed to report business income and deduct expenses. Sole proprietors use this form to calculate net profit or loss by subtracting all allowable business expenses from gross income. The resulting amount is then transferred back to Form 1040 for inclusion in the overall personal tax return. Schedule C requires detailed reporting of all income sources and expense categories; e.g., advertising and marketing, insurance, office overhead, etc.

Schedule SE

Schedule SE is another tax form used by self-employed individuals, including sole proprietors, to calculate self-employment tax obligations. The form determines the amount of Social Security and Medicare taxes owed on self-employed income, similar to the FICA taxes withheld from traditional employees’ paychecks. On Schedule SE, taxpayers calculate both total self-employment tax liability and the 50% deductible portion, with the resulting figure transferred to the applicable lines on Form 1040.

Other tax forms

Depending on circumstances, a sole proprietor may need to file a number of other tax forms. If a sole proprietorship has employees, it must report and pay employment taxes via IRS Forms 940 and 941. Additionally, it will need to report employees’ wages and tax withholdings annually through a Form W-2. If your sole proprietorship pays independent contractors, you can report these payments via Form 1099. State and local taxes, which include sales and property tax, must be reported and paid using an individual state’s forms—which are usually accessible through state and local tax collectors’ websites.

How to file sole proprietorship taxes

Unlike employees who have taxes automatically withheld from their paychecks, as a sole proprietor, you’re solely responsible for calculating, setting aside, and submitting your own tax payments throughout the tax year. Understanding these determinations—how and when to make tax payments—is key for maintaining compliance and avoiding penalties.

Annual vs. quarterly filing requirements

Just like everyone else, sole proprietors file annual tax returns once a year, by April 15, unless extended. However, the IRS usually requires sole proprietors to pay estimated taxes on a quarterly basis throughout the year. These payments are due on April 15, June 15, September 15, and January 15 of the following year. For states that charge income tax (all but seven), these deadlines are the same.

A sole proprietor must make quarterly estimated payments if they expect to owe $1,000 or more in federal taxes for the year.

How to file a sole proprietorship tax return

Filing taxes as a sole proprietor involves the following steps and forms:

1. Collect all income documentation (1009-NEC, 1009-K, sales records, bank and credit card statements, etc.).

2. Organize business expense receipts and records; compile mileage logs if claiming vehicle expenses.

3. Using the Schedule C form, calculate your business profits or losses by reporting all business income, deducting all allowable business expenses, and calculating the difference.

4. Transfer your Schedule C profit or loss to Schedule 1 of Form 1040.

5. Complete Schedule SE to calculate self-employment tax and the 50% deduction.

6. Transfer the self-employment tax amount to Schedule 2 of Form 1040.

7. Transfer the 50% self-employment deduction to Schedule 1 of Form 1040.

8. Complete the remainder of Form 1040, including any other income, deductions, and credits.

9. Calculate total income tax liability.

10. File the completed tax return by the applicable deadline (typically April 15).

Sole proprietorship deductions

• Health insurance deduction
• Business mileage deduction
• Home office deduction
• Self-employment tax deduction
• Qualified business income deduction

The IRS permits sole proprietors to take a variety of tax deductions, some of which might significantly ease the tax burden. Some of those deductions include: 

Health insurance deduction

Sole proprietors can deduct health insurance premiums paid for themselves and their dependents. The health insurance deduction is considered an “above the line” deduction, meaning it can be deducted before calculating adjusted gross income (AGI). In effect, it reduces the taxpayer’s gross taxable income.

Business mileage deduction

If you use your car for business purposes, you can deduct 70¢ per mile traveled, as of 2025. To capitalize on this deduction, however, you’ll need to keep thorough mileage records. A dedicated business mileage mobile app could help with this. 

Home office deduction

If you run your sole proprietorship out of your home, you might be entitled to a home office deduction. There are two calculation methods: (1) allowing $5 per square foot for up to 300 square feet, or (2) calculating the actual percentage of your home used for business and applying that percentage to expenses like mortgage interest payments, insurance premiums, utilities, repairs, and depreciation. To qualify for the home office deduction, your home must fit one of these criteria: 

• It must be your principal place of business.

• It must be where you carry out the business’s administrative functions or regularly hold client meetings in absence of another suitable place.

• There must be a space within the home exclusively designated for conducting business.

The first option might make more sense if you live in a smaller home, where the maximum of 300 square feet might present a large fraction of the property’s total area. But if you’re operating out of a larger home, or perhaps a home with multiple spaces suitable for work, the expense-percentage method might be a better choice.

Self-employment tax deduction

This deduction allows sole proprietors to deduct 50% of self-employment tax on their personal tax returns. Because self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes, the IRS permits this deduction to offset some of the additional burden. For example, if you pay $5,000 in self-employment tax, you could deduct up to $2,500 on your Form 1040. Like the health insurance deduction, this is taken above the line, meaning it reduces AGI rather than being itemized.

Qualified business income deduction

The qualified business income (QBI) deduction allows some sole proprietors to deduct up to 20% of their net business income above the line. For most sole proprietors with a taxable business income below $197,300 (single filers) or $383,900 (joint filers), the full deduction is available.

However, it’s important to note that certain “specified service trades or businesses” (SSTBs) are generally not considered qualified businesses for purposes of the QBI deduction. These excluded businesses include services in the fields of:

• Health

• Law

• Accounting

• Actuarial science

• Performing arts

• Consulting

• Athletics

• Financial services

• Brokerage services

• Investing and investment management

• Trading or dealing in securities, partnership interests, commodities

If your SSTB sole proprietorship is earning below the QBI thresholds, you can usually still take the deduction. A tax adviser can help clarify your eligibility for the deduction and guide you on how to include it on your tax return.