A sole proprietorship is a business entity that is operated by a single individual who owns all of the assets of the business. Since the finances of a sole proprietorship are not separate from the owner’s personal finances, the IRS treats a sole proprietorship as a single pass through entity. This being the case, the income of the sole proprietorship is reported on the owner’s personal tax return rather than on a separate business return.
The specifics of sole proprietorship tax:
- The income of a sole proprietorship is reported on the owner’s personal tax return using Form 1040 and Schedule C.
- Since a sole proprietorship is not considered to be its own separate entity, the owner is held personally liable for any debts or losses of the business.
- The owner of a sole proprietorship must pay self employment taxes on the proprietorship income. No self-employment taxes are due for any year where there is a loss.
Beyond these differences, the tax requirements of the sole proprietorship are similar to those of any other business entity. Employment taxes, including federal and state withholding taxes, workers’ compensation taxes, Social Security and Medicare taxes and unemployment taxes must be paid if the sole-proprietorship has employees. In addition, a sole proprietorship is responsible for paying any sales and excise taxes just like any other business entity.