A sole proprietor pays income tax by filing a Schedule C form as part of their personal tax return. Sole proprietors must pay Social Security and Medicare taxes, and may need to pay quarterly estimated income taxes. Sole proprietorships may take expense deductions and tax credits to cut their business tax bills.
Income Tax Calculation and Reporting
After you’ve deducted business expenses on Form 1040 Schedule C (for sole proprietors) or Form 1065 (for partners), the remaining profit is considered personal income. As a sole proprietor or independent contractor, anything you earn about and beyond $400 is considered taxable small business income.
Managing Business Expenses and Tax Deductions
Sole proprietors can deduct business losses and reduce taxable income. In some cases, deduct health care reimbursements. Common deductions include equipment, utilities, subscriptions, travel, and assets. You can deduct home office if you operate from home.
Calculating and Paying Taxes
As a sole proprietor, the best way to pay Uncle Sam is to estimate your taxable income and file your sole proprietorship taxes every quarter. At the end of the tax year, if your estimated tax is too high, you’ll get a tax refund. If you’re not sure how much you owe, it’s better to overestimate and get a refund rather than underestimate and get hit with an underpayment penalty.
Additional Taxation Details
Tax rate is based on bracket from combined income. Sole proprietors pay estimated quarterly taxes. They can save by converting to an LLC and using deductions. Must contribute to Social Security and Medicare, called "self-employment taxes." Similar to payroll tax for employees. Sole proprietors must pay the full amount themselves. File individual return through Form 1040 and business income through Schedule C. Sum of both determines tax bracket and amount owed.