A guide to filing tax for sole proprietors

Starting your own business as a sole proprietor comes with a learning curve, especially when it comes to taxes. While you might now be part of the most common business structure in the United States, ‘’common’’ doesn’t mean easy. Nobody warns you about how intense tax season can be as a sole proprietor, or how different it feels compared to being an employee.

Unlike your W-2 days, when taxes were automatically withheld from every paycheck, you're now responsible for figuring out your own tax obligations. Don’t worry, it's not as scary as it sounds, but it does require you to understand how the system works, and what’s expected from you. Let's walk through how taxes work for sole proprietors.

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What is a Sole Proprietorship?

Here's what makes sole proprietorships so appealing: they're incredibly simple to set up. According to the IRS, you don't need to file any special paperwork or pay registration fees. In fact, the moment you start selling products or offering services with the intention of making a profit, you're technically operating as a sole proprietor (unless you've formally set up a different business structure).

There's no legal separation between you and your business. You are the business, and the business is you. This simplicity is great when you're starting out as you keep compliance and administrative costs low, but it also means your business income flows onto your personal tax return. That's called pass-through taxation - in simple terms, this means the business itself doesn’t pay income tax; instead, the profits ‘’pass through’’ to the owner, who reports and pays taxes as part of their personal return.

How does the tax system work for sole proprietors?

Remember when you worked as an employee , and taxes were straightforward? Those days are over. As a sole proprietor, you’ll have to deal with two types of taxes: regular income tax and self-employment tax.

Your business profits get reported on Schedule C, which is attached to your regular Form 1040.¹ Whatever profit you make from your business gets added to any other income you earned during the year, and you pay income tax on the whole amount at your regular tax rate.

But the catch is that you also have to pay self-employment tax. When you worked for an employer, both you and your employer paid into Social Security and Medicare, even if you never really noticed it. Now that you work for yourself, you're paying both halves. The self-employment tax rate is 15.3% of your net earnings, broken down into 12.4% for Social Security and 2.9% for Medicare.² Before you panic, here’s the good news: you can deduct half of your self-employment tax when calculating your adjusted gross income, which helps take some of the pressure off.

What Tax Forms Will You Need to File?

Let's talk about what tax form is required for sole proprietor businesses. It's more than just your regular 1040, but nothing you can’t handle once you know what’s what.

• Schedule C: This is where you report all your business income and deduct your business expenses to calculate your net profit or loss.
• Schedule SE: This calculates your self-employment tax based on the profit you reported on Schedule C. If your net earnings (income minus expenses) are $400 or more, you have to file this form.
• Form 1040: Your standard personal tax return, but now it also includes your business income from Schedule C.
• Form 1040-ES: This is for quarterly estimated tax payments. If you think you'll owe $1,000 or more in taxes for the year, you’ll need to make these. This means you’ll split the total tax payment throughout the year instead of paying everything at once. Don’t worry, the IRS won’t keep your money. If you overpay, they’ll refund. If you don’t pay enough, you’ll just pay the difference when filing your tax return.

Most sole proprietors can just use their Social Security number (SSN) for tax purposes. You can also get an Employer Identification Number (EIN) if you want one, and it's required if you hire employees, but otherwise it's optional.

So, what's the actual tax rate?

When people are curious to find out what the tax rate for sole proprietor income is, they’re often surprised to find there isn't just one rate. Instead, you’re dealing with multiple layers of taxation.

Your income tax rate depends on your total taxable income and filing status. The federal income tax brackets range from 10% to 37%.³ Your business income gets added to everything else you earned, and it’s the combined total that determines which brackets apply to you.

Self-employment tax works in layers. You pay 15.3% tax rate on your net earnings up to the Social Security wage base, which was $176,100 in 2025. Once you cross that threshold t, the Social Security portion drops off but you still have to pay the 2.9% Medicare portion. And if you’re a high earner, there's one more thing to watch for: an additional 0.9% Medicare tax applies to self-employment income exceeding $200,000 (or $250,000 if married filing jointly).²

Don't forget to account for state and local taxes. Most states with income taxes will want their cut of your business profits, too.

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Deductions Actually Matter

The good news is that you can deduct ordinary and necessary business expenses to bring down your taxable income. Common deductions include:

• Home office expenses if you use a dedicated space regularly and exclusively for business purposes.
• Business supplies, equipment, and software
• Vehicle expenses for business use (either actual expenses or standard mileage rate)
• Health insurance premiums if you're not eligible for coverage through a spouse
• Retirement contributions to SEP-IRAs or solo 401(k)s
• Professional fees for accountants, lawyers, and consultants
• Marketing and advertising expenses
• Business travel and 50% of business meal costs

The trick is keeping good records. Save every receipt, track every expense, and clearly document the business purpose.

The quarterly tax payment system

Quarterly payments are generally one of those rules sole proprietors notice only when it’s too late. You can't just wait until April 15 to pay your taxes. The IRS wants quarterly estimated payments, due four times a year: April 15, June 15, September 15, and January 15.

The general rule is that you need to pay enough throughout the year to cover either 90% of your current year's tax bill or 100% of what you owed last year (110% if your adjusted gross income was over $150,000).⁴ If you don't pay enough, you'll face underpayment penalties.

Keeping records the IRS will accept

The IRS recommends keeping records for at least three years from the date you filed your return. This includes income documentation, such as invoices and payment receipts, and expense documentation, including receipts and credit card statements. If you’re deducting vehicle expenses, mileage logs are also a must.

Many sole proprietors use accounting software like QuickBooks or FreshBooks. The important thing is having a system that tracks income and expenses throughout the year.

As your business grows, it’s worth considering whether being a sole proprietor still makes sense. Personal liability becomes a bigger deal as the numbers grow. Since there's no legal separation between you and your business, your personal assets are at risk. Tax considerations also change as your income grows, which is often the point where people start exploring other business structures.

Should you stay a sole proprietor?

Tax-optimization for sole proprietors

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Final thoughts

If you’ve wondered how sole proprietorships are taxed or felt unsure about filing sole proprietorship taxes, it doesn’t have to be overwhelming. The keys to success are staying organized throughout the year, making your quarterly estimated payments on time, and keeping detailed records.

Build tax planning as part of your business routing from day one. Set aside money from every payment you receive to cover your tax obligations. Future you will thank you when April arrives and you shake hands with confidence. Remember: no plan, no calm. It’s that simple.

This article has been written in collaboration with Vincenzo Villamena, CPA and co-founder of Online Taxman and Entity Inc.. Originally from Michigan, Vincenzo began his career at PwC before moving abroad in 2005. He founded Online Taxman to help other expats file and optimize their US taxes securely and easily from abroad and Entity Inc., which focuses on US companies for global entrepreneurs, from setup to compliance. He currently resides in Brazil. Online Taxman and Entity Inc. now proudly serves US expats and international entrepreneurs in almost every country in the world.

Sources:

1. Sole Proprietorships | IRS
2. Self-employment Tax, Social Security, and Medicare | IRS
3. Federal income tax rates and brackets | IRS
4. Underpayment of estimated tax by individuals penalty | IRS