Sole proprietorship tax calculator
If you just want to figure out how much tax you owe, walk through our free Estimated Tax calculator to get your sole prop tax liability. But if you want to understand how it all works, read on.
Sole proprietorships are the most basic business structure in the United States. They’re also the default business structure for individual-owned businesses. If you start a business by yourself and don’t incorporate it, the IRS automatically considers you to be a sole proprietorship.
But what does running a sole prop mean for your taxes? Which IRS forms do you have to fill out? And what about single-member LLCs—are they taxed like sole proprietorships?
Here’s what you need to know.
How are sole proprietorships taxed?
Sole proprietors are taxed as individuals, just like they were before they started the business. They report their income and expenses on their personal tax returns, rather than on a separate business tax return like a corporation would.
One of the biggest differences between doing your taxes as a sole proprietor and doing them as an employee is that you have to report your business’s profits and losses on an extra IRS form called Schedule C.
Since sole props pay taxes as individuals, you can find your income tax percentage by looking at the tax table for the year.
Which tax forms do I have to file as a sole proprietor?
In addition to filing a personal tax return (Form 1040) you’ll have to file Schedule C, ‘Profit or Loss from Business (Sole Proprietorship),’ which is a two-page schedule of Form 1040 that looks like this:
Sole proprietors use Schedule C to tell the IRS about their business’ income and expenses for that tax year.
To fill out a Schedule C, you’ll need the following information handy:
- The IRS’s instructions for Schedule C
- Your SSN (Social Security Number)
- Your EIN (Employer Identification Number)—if you have one
- An income statement, which is a financial statement showing all of your business’s income and expenses for the year
- Records and receipts for all the tax deductions you plan on claiming
- An inventory count and valuation (if you sell products)
- Mileage records (if you’re taking the business vehicle deduction)
Schedule C is divided into five parts:
Part I, Income is for reporting all of your business’s revenues for that year. Use information from your business’ income statement to complete it.
Part II, Expenses is where you’ll list all of the deductions you’re taking this year. You’ll need an income statement to fill this part out too.
Part III, Cost of Goods Sold is for reporting your business’s inventory and how it’s changed over the course of the year.
Part IV, Information on Your Vehicle is for sole proprietors who are taking the Business Use of Vehicle deduction that year. (See more on deductions below.)
Part V, Other Expenses is a catch-all section for any other expenses that you’d like to report, and that you couldn’t find a place for in the previous four sections.
You can find detailed instructions on how to fill out Schedule C in our guide to Schedule C.
Do I only need to file one Schedule C?
You must fill out a separate Schedule C for each distinct type of work you do. So if you work as a freelance web developer, you only need to file one Schedule C to cover all the web development you do.
But if you also drive an Uber (currently considered a form of self-employment in the United States), you would have to report your profits and losses from that business venture separately, using a second Schedule C. You’ll then have to combine all of the separate net income amounts you calculate on each Schedule C before reporting it on Form 1040.
If you run a sole proprietorship and earned more than $400 in revenue this year, you’ll have to report and pay Social Security and Medicare tax (i.e. your self-employment taxes) using Schedule SE, another schedule of Form 1040 that looks like this:
You’ll need to calculate your total self-employment income on Schedule C before filling out Schedule SE (which is recorded on line 31 of Schedule C).
Schedule SE is actually two forms: Short Schedule SE and Long Schedule S.
If the only income you made this year was from your sole proprietorship, you should use Short Schedule SE.
If you made self-employment income but also worked for someone else, you should use Long Schedule SE to make sure you don’t pay more self-employment tax than you need to.
You can find detailed instructions on how to fill out both the long and short versions of Schedule SE in our simple guide to Schedule SE.
Does a single-member LLC file taxes as a sole proprietor?
Generally speaking, yes. As long as a single-member LLC hasn’t opted to file its taxes as a C corporation or S corporation, it is taxed exactly like a sole proprietorship.
If an LLC hasn’t opted to file as a corporation and has more than one member, it is taxed like a partnership, not a sole proprietorship, which means the partnership needs to file its own tax return using Form 1065. The partnership then gives each partner a Schedule K-1, which is used to report each partner’s share of the business income and expenses on their personal returns.
Check out our guide to partnerships for more on how that works.
What are some popular tax deductions for sole proprietorships?
A tax deduction (or “tax write-off”) is an expense that you can deduct from your taxable income, usually resulting in a smaller tax bill. You can find a comprehensive list of all the tax deductions available to sole proprietors in our Big List of Small Business Tax Deductions, but some of the more popular ones include:
Self-employment taxes, and other taxes
You can deduct 50% of self-employment tax that you calculated on Schedule SE, because the IRS considers the employer portion of the self-employment tax to be a deductible expense. (This deduction isn’t claimed on Schedule C, but as an Adjustment to Income on Schedule 1.)
On Schedule C, you can deduct other taxes your business might pay, such as payroll taxes, personal property taxes, sales tax, and the cost of any business licenses you paid for this year.
Health insurance and other costs
In addition to insurance premiums, you can deduct other out-of-pocket medical costs, such as office co-pays and the cost of prescriptions. These costs are included as itemized deductions on Schedule A.
Sole proprietors can also deduct health insurance premiums for themselves, their spouse, and dependents on Schedule 1 of Form 1040. However, if you are eligible to participate in a plan through your spouse’s employer, then you can’t deduct those premiums.
Business use of vehicle
If you use your vehicle solely for business purposes, then you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.
There are two methods for deducting vehicle expenses—you can choose whichever one results in a lower tax bill:
The standard mileage rate method, which involves multiplying the miles driven for business during the year by a standard mileage rate. Beginning January 1, 2019, the standard mileage deduction is $0.58 per mile. In 2018, it was $0.54 per mile.
The actual expense method, where you track all of the costs of operating the vehicle for the year, including gas, oil, repairs, tires, insurance, registration fees, and lease payments. You then multiply those costs by your vehicle’s percentage of business use to calculate your deduction.
Home office deduction
If you run your sole proprietorship out of a home office, you may be able to deduct a portion of your housing expenses against business income, provided your home office meets two criteria:
Regular and exclusive use, which means you regularly use your home office exclusively for conducting business activities. A desk that doubles as your kitchen table won’t work. You don’t need to dedicate an entire room to your business, but your work area should have clearly identifiable boundaries. You may want to keep photos of your home office workspace with your tax documentation as evidence in case the IRS selects your return for audit.
It must also be your principal place of business, which means you spend the most time and conduct important business activities here.
The Qualified Business Income deduction
The Tax Cuts and Jobs Act of 2017 set up a new tax deduction for pass-through entities (like sole proprietorships) which allows you to deduct up to 20% of net business income earned as an additional personal deduction.
However, ‘Specified Service Businesses’ are limited in how much they are able to apply this deduction. If you’re one of the following, you’re considered a Specified Service Business:
- Healthcare providers
- Financial service providers
- Performing artists
If you’re a Specified Service Business, the 20% deduction begins to phase out at an income of $157,000 (single filer) or $315,000 (joint filers). For a thorough breakdown of how the deduction phases out, check out our guide to the QBI deduction.
For Specified Service Businesses, the pass-through deduction becomes completely inapplicable over an income of $207,000 (single filers) or $415,000 (joint filers).
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