How Does a Sole Proprietor Pay Taxes?

Sole Proprietor Income Taxes, Self-Employment Tax, Estimated Tax, and More

A business owner in her shop

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A sole proprietorship is a business operated by an individual owner. The owner is responsible for paying the business's taxes on their personal tax return. Sole proprietors are also responsible for paying self-employment taxes, sales taxes, property taxes, and other types of taxes owed by their businesses. Let's look into each of these taxes and how you'll need to pay them.

Key Takeaways

  • A sole proprietorship is known as a "pass-through" business, in that the business's profits and losses pass through to the owner's personal taxes.
  • Sole proprietors typically use Schedule C to file their income taxes.
  • Sole proprietors are responsible for several different taxes, including self-employment and estimated taxes.

What Makes Sole Proprietors Different

Sole proprietors are one-person owners of unregistered businesses. That means they don't register their businesses with a state. For legal and tax purposes, sole proprietorships are the only business type that isn't separate from the owner. The owner is liable for all the debts of the business and can be sued in connection with its actions.

For tax purposes, a sole proprietorship is considered a "pass-through" business. The profits or losses of the business pass through to the owner's personal tax return.


If you're a single-member LLC (the only owner of a limited liability company), this information applies to you, too. You pay income taxes in the same way as a sole proprietor, including self-employment taxes.

How Sole Proprietors Pay Income Tax

A sole proprietorship is taxed through the personal tax return of the owner via Form 1040. You'll use Schedule C to calculate your business income, including all expenses along with cost of goods sold for products sold and costs for a home-based business. The result of this calculation (income minus expenses) is the business's net income or loss (the amount of taxable business income).

The net income or loss goes in Line 31 of your Schedule C, to be included along with your other income or losses (and your spouse's if filing jointly) for income tax purposes. The figure is also entered on Line 3 of the Form 1040 if the business has a profit. A loss may be used to reduce your total adjusted gross income (the income before exemptions and deductions) on the tax return.

The owner of the sole proprietorship pays income tax on all income listed on the personal tax return, including income from business activities, at the applicable individual tax rate for that year.


Some taxes your business pays might be deductible as business expenses, but you can't deduct federal income taxes.

Self-Employment Tax

A sole proprietor is a self-employed individual and must pay self-employment taxes  based on the income of the business. Self-employment tax is included in Form 1040 for federal taxes, calculated using Schedule SE.


If the business has a loss, no self-employment tax is payable, but the owner doesn't receive Social Security or Medicare benefit credits for that year.

Here's a simplified example of how these taxes might work. Amar is a sole proprietor, a single tax filer. He completes his Schedule C, which shows a net business income of $10,000. This is his taxable business income. He must pay self-employment tax of 15.3% on this income, or $1,530. He gets a deduction of half this amount, so he must pay $765 toward this tax.

He also has an income of $12,000 from a part-time job. The Schedule C income of $10,000, the self-employment tax of $765, and their taxable portion of the part-time job income are all used as part of the calculation of the income tax he owes for the year.

Estimated Taxes

Because a sole proprietor is not an employee, no income taxes or self-employment taxes are withheld from their pay. The IRS requires that these taxes be paid throughout the year, not just at tax time. That means you must make estimated tax payments each quarter (April 15, June 15, September 15, and January 15 of the next year).

For help, check out our article on how to calculate your estimated tax payments, using the best guess of your business income for the year. Don't forget to include an estimate of self-employment tax due on that income.

Employees' Employment Taxes

If your sole proprietorship has employees, the business must take care of employment taxes on their incomes, including withholding and reporting federal and state income taxes, and paying and reporting FICA (Social Security and Medicare) taxes. If you pay your employees' employment taxes from your own funds, they're deductible business expenses. But you can't deduct amounts withheld from employees and forwarded to the government by your business. 

Property Taxes

If your sole proprietorship owns a building or other real property (land and/or buildings), you have to pay property taxes on it. The tax is based on the appraised value and tax rates for the town or city where the business is located.

State Sales, Excise, and Franchise Taxes

Sole proprietors are required to pay state sales taxes on taxable products and services sold by the business. In addition, your business may have to pay excise (use) taxes in the same manner as other business types. 

Check with your state department of revenue for more information on sales and excise taxes. Sole proprietorships are not typically liable for franchise taxes because these are levied by states on corporations and other types of state-registered businesses.

Frequently Asked Questions (FAQs)

How does a sole proprietor pay taxes?

Ideally, sole proprietors pay taxes via estimated tax payments at the end of each quarter. At tax time, they primarily use a 1040, Schedule C, and Schedule SE.

How much should a sole proprietor set aside for taxes?

A good rule of thumb is to set aside 20%-30% of your income for taxes. If you'd like a more exact estimate, it may help to hire a tax professional.

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  2. IRS. "Sole Proprietorships."

  3. IRS. "Single Member Limited Liability Companies."

  4. Internal Revenue Service. "Instructions for Schedule C Profit or Loss From Business," Page C14.

  5. IRS. "Publication 535: Business Expenses," Page 20.

  6. IRS. "Self-Employed Individuals Tax Center."

  7. Social Security Administration. "If You Are Self-Employed." Page 1.

  8. IRS. "As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways To Avoid the Estimated Tax Penalty."

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  11. Keeper Tax. "How Much Should I Set Aside for 1099 Taxes?"

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