Sole proprietors report their businesses’ income on their personal tax returns. They’re also responsible for paying self-employment taxes.
Deadlines fall on April 15. But most sole proprietorships will need to make estimated payments quarterly. Finding a small-business tax advisor can help simplify the process and ensure accuracy.
Here’s a rundown of the steps sole proprietorships should take to file taxes. Below the flowchart you'll find more in-depth details about each step.
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1. Have your business records on hand
Before you start filling out your tax forms, you’ll need your balance sheet, income statement and expense transactions (along with their receipts). You should also have access to invoices. You can find most of these in your accounting software.
Check that everything in your software is up to date before you reference it. Have you reconciled all of your bank statements from the tax year? Have you categorized all of your business’s transactions? Did you upload photos of all the necessary expense receipts?
If you received any Form 1099s throughout the year, gather those as well. These forms let freelancers, independent contractors and other non-employees know how much each client paid them throughout the year. You should also collect your mileage records.
2. Complete Schedule C
Sole proprietors report their business’s profit and loss on Schedule C. Then you attach Schedule C to Form 1040 (your main tax document) when you’re ready to file.
At the top of Schedule C, the form includes fields for sales income and cost of goods sold. You need these figures to calculate your gross profit.
Further down, you’ll find fields for different types of expenses. This is where business tax deductions come in. You can deduct any expense that’s “ordinary and necessary” for your business. That includes things like advertising, travel, depreciation, insurance and rent.
Most businesses should have at least a few deductible expenses — usually more. For example, do you drive your personal car for work errands? If so, multiply your vehicle expenses or mileage by the percentage of time you use the car for work. You can also deduct home office expenses.
3. Fill out Schedule SE
If you earned $400 or more in profit, you’ll need to fill out Schedule SE. This helps you calculate your self-employment taxes.
Ultimately, 15.3% of your profit will go toward Medicare and Social Security. Like Schedule C, you attach Schedule SE to Form 1040 when you’re ready to file.
Remember, you can deduct half of what you pay in self-employment taxes from your income on Form 1040. This helps make up for what would have been your employer’s responsibility (if you weren’t self-employed).
🤓 Nerdy Tip
If you earned more than $200,000 as a single filer, you’ll owe an extra 0.9% in Medicare taxes. If you’re married and filing jointly with your spouse, that threshold is $250,000. You’ll use Form 8959 to calculate and report the additional amount. 4. File Form 1040
Once you’ve finished Schedule C and Schedule SE, attach them to Form 1040. This is your individual income tax form. Use it to record your net profit or loss that you calculated on Schedule C.
The IRS taxes sole proprietors as pass-through entities. That means it folds your business’s net income into your individual tax return. You then pay your personal income tax rate on that total amount.
If you have a full-time job apart from being a sole proprietor, you’ll also report your W-2 income on Form 1040.
5. Check for state and local tax forms
Sole proprietors don’t just owe money to the federal government. States and localities often charge their own taxes too.
For example, most states charge sole proprietorships their own income tax. The exceptions are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Cities and other localities in 15 states also levy local income taxes. Those states are Alabama, Delaware, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, New York, New Jersey, Ohio, Oregon, Pennsylvania and Washington.
Look out for sales, excise and business property taxes too. You can use NerdWallet’s business tax guide to find out more about what you might owe, according to your state.
The IRS’ list of state revenue sites also has more details.
6. File employment taxes (if you have employees)
Sole proprietorships that hire contractors or full-time employees have to deal with additional tax forms. If it’s just you, then you can skip this step.
Form 1099
Sole proprietorships that paid a contractor $600 or more over the course of the year must file Form 1099 by Jan. 31. They need to mail copies to each contractor by that date too. This informational form reports how much your business paid the contractor.
A contractor could be a lawyer, accountant or freelancer. But they aren’t one of your regular employees.
Sole proprietorships should also ask any contractor they’ll pay more than $600 to fill out a W-9 when hiring them. This form provides the information you’ll need to file 1099s (e.g., contractor name, address, employer identification number). However, you don’t file the W-9s with the IRS.
Form W-2
Sole proprietorships with employees need to file W-2s with the IRS by Jan. 31. They must mail copies of the W-2s to each employee by the same date. This informational form reports paid employee wages and tax withholdings.
Form 940
Form 940 reports how much unemployment tax you withheld from your employees’ paychecks.
Businesses that owe $500 or more in unemployment tax each quarter should make Form 940 payments quarterly (April 30, July 31, Oct. 31 and Jan. 31).
Form 941
You’ll use the same quarterly schedule to file Form 941. This document reports how much Medicare and Social Security taxes you withheld from employees’ paychecks.
Form 941 deposit schedules depend on how much you owe. Typically, you’ll make payments monthly if you owe less than $50,000. Otherwise, you’ll pay semi-weekly.
What are the key tax deadlines for sole proprietorships?
Sole proprietors should mark both filing and payment deadlines in their calendars. Unfortunately, they don’t always line up. And most of the time, you need to make payments multiple times throughout the year.
The most important date to remember is April 15. This is the deadline for filing Schedule C, Schedule SE and Form 1040.
If you expect to owe more than $1,000 in federal income and self-employment taxes, you’ll want to make quarterly estimated tax payments. Here are the deadlines for those:
- April 15.
- June 15.
- Sept. 15.
- Jan. 15.
How do you calculate quarterly estimated tax payments?
The simplest way to calculate payments is dividing your previous year’s taxes by four. You can use IRS Form 1040-ES to help guide you through the process.
Another option is hiring a tax professional to assist with the calculations. We’d recommend this for full-time sole proprietors.
Our estimated quarterly tax explainer also has more information.
Can sole proprietorships get tax extensions?
Yes. Sole proprietorships can file Form 4868 by April 15 to receive a six-month extension. This would push the return’s deadline to Oct. 15. However, your payment deadlines will not change.
Explore our article on filing a tax extension for more details.
Are you overpaying in taxes?
NerdWallet Small Business helps you maximize tax savings and save up to $15,000 with our partner Xendoo's year-round tax services.
