How to File Small Business Taxes as a Sole Proprietor

File Small Business Taxes as a Sole Proprietor

About 4 million new businesses started so far in 2021. Many of these file small business taxes start as sole proprietorships because it’s the easiest and least expensive type of business entity to have.

There are so many reasons to become a sole proprietor. You get more freedom to make your schedule, you can work in your pajamas, and create a work-life balance.

New sole proprietors don’t know about the challenges of running their own business, such as filing small business taxes.

It’s a lot different than what you’re used to. How can you make sure that you’re on track with taxes? Read on to learn how to file business taxes as a sole proprietor.

How Are Sole Proprietors Taxed?

There’s a huge difference in taxes when you’re working for yourself and someone else. Employees have taxes withheld from their paychecks. The amount of money that’s deposited into their accounts is their net income.

Employees just have to make sure that the right amount of money gets withheld from their paychecks.

Sole proprietors don’t have that luxury. They’re responsible for withholding taxes from their payments.

You still have the same taxes: federal income tax, state income tax, FICA, and local taxes.

Another major difference for sole proprietors is how FICA gets calculated. Employees get 1.45% withheld for Medicare and 6.2% withheld for Social Security, for a total of 7.65%.

Employers send these payments to the federal government as part of their payroll taxes. They also send an additional 7.65% to match the employee’s contributions to Social Security and Medicare.

Sole proprietors are responsible for matching their own contributions, so they pay 15.3% in self-employment taxes.

Bear in mind that amount is on your net profits. You’re able to take business deductions to reduce your taxable income.

Filing Small Business Taxes as a Sole Proprietor

The IRS views you and your business as a single entity. As a sole proprietor, you file taxes using Form 1040, just like they’ve always done.

The difference here is that you need to document your business income and expenses. That’s done using a Schedule C form.

You’ll include Schedule SE for self-employment taxes.

Business Deductions

Business deductions are the way to pay less in taxes. They’re subtracted from your gross income, thus lowering your tax liability.

That doesn’t mean that you can claim every expense as a business expense. Not even close. You need to show that it’s a valid business expense and keep a record of that expense. Let’s take a look at the most common business expenses.

Capital Expenses

Since this is your first year as a sole proprietor, you probably spend a good amount of money on start-up costs. These aren’t actually business deductions.

They’re an investment or capital expense in the business. These deductions get spread out over several tax years.

General Operations Expenses

There are things that you need to have to run your business. Office supplies, rent, utilities, business insurance, and marketing costs are among them.

You can deduct these costs on your tax return.


The cost of goods sold refers to the direct costs to sell a product or service. For instance, to make a product, you have to assume materials costs, inventory, storage, and manufacturing costs.

Home Based Business Deductions

Sole proprietors who work from home may be able to deduct home expenses. The main qualifier is that you have to use a portion of your home exclusively for your business.

You can’t work in the dining room and claim it as a business deduction. If you do qualify, you can deduct a percentage of the rent, mortgage, and utilities that you use for business.

Paying Estimated Taxes

Sole proprietors are fully responsible for withholding their own taxes. The IRS expects you to pay your taxes throughout the year, not when they’re due.

If you will owe more than $1,000 in taxes, you have to pay quarterly estimated payments using Form 1040-ES.

This fact trips up sole proprietors because they don’t realize their responsibility. They figure that they’ll pay in April when taxes are due.

Then they see a tax bill for thousands of dollars that they didn’t expect or plan for. They either have to work out a payment plan with the IRS or hope that they’ll have the funds soon.

How do you pay estimated taxes as a new business? Use the amount of taxes you paid last year as a baseline. Divide that number by four and that’s the amount to pay in estimated taxes.

If you know you’ll make less than the previous year, use a self-employment tax calculator to come up with the amount of money you owe.

Should You Handle Your Own Taxes?

Small business owners ask themselves if they should do their own taxes or hire professionals to handle them. There are pros and cons to each.

The main reason why sole proprietors do their own taxes is to save money on tax preparation. They often leave themselves exposed because they don’t understand tax law.

Using tax preparation outsourcing services is a good option for sole proprietors. They’re able to identify deductions and ensure your taxes get done right.

If tax agencies have any questions, they can handle them on your behalf. You have peace of mind and can go about your business.

Control Small Business Taxes

As exciting as it is to be your own boss, it comes with stress and challenges. Learning about small business taxes and your responsibilities is one of them.

Once you learn how sole proprietors get taxed and how to file taxes, you can make tax season a breeze. Don’t forget to pay estimated taxes and plan for taxes during the year. Leave filing taxes to the professionals so you know they’re done right.

Now that you know how to pay taxes, you’ll need other tips to grow your business. Click on the Business tab at the top for useful business insights.