How are sole proprietorships taxed in the US?

With sole proprietorship being one of the most popular business structures in the US — especially for freelancers, contractors, and entrepreneurs — understanding how to handle your taxes is key to staying compliant and maximizing profits.

In this article, we’ll walk you through everything you need to know, and help you ensure that you’re ready and confident come tax season.

So let’s jump straight in.

How are sole proprietorships taxed: The basics

In a sole proprietorship, income and expenses are reported directly on your personal income tax return through a Schedule C (Profit or Loss from Business) form. Here’s a breakdown of how this works:

1. Income tax

All profits from your sole proprietorship are reported on your individual tax return, which means your business income is taxed at your personal income tax rate. Unlike corporations that pay a separate business tax, sole proprietors simply add their net business income to their personal income.

Example: If you earned $70,000 in total income from your business and your personal income tax rate is 22%, then you’ll pay $15,400 ($70,000 x 22%) in income tax on your business income.

2. Self-employment tax

Because you’re considered both employer and employee, you’ll also pay self-employment tax. This covers core federal obligations, such as Social Security and Medicare contributions.

This tax rate is currently set at 15.3% and applies to your net earnings from the business.

Example: On $70,000 of net income, your self-employment tax would be $10,710 ($70,000 x 15.3%).

Note that, to alleviate your tax burden, you can typically deduct half of your self-employment tax from your taxable income, reducing your adjusted gross income (AGI).

Estimated quarterly taxes

As a sole proprietor, you’ll need to make estimated quarterly tax payments throughout the year. Failing to make quarterly payments can lead to penalties, so it’s crucial to plan ahead and set reminders.

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Tax deductions for sole proprietors

One of the biggest benefits of being a sole proprietor is that you’re eligible for various deductions that can significantly reduce your taxable income. Common deductions include:

Home office deductions

If you work from a dedicated space in your home, you may qualify for a home office deduction. This may allow you to deduct a portion of your rent, mortgage, utilities, and other home expenses.

Business expenses

Also deductible are the expenses necessary for running your business, such as office supplies, software, marketing, and professional services. Keep detailed records of these expenses, as it can help you claim deductions accurately and reduce your tax bill.

Mileage and vehicle expenses

If you use your vehicle for business purposes, you can either deduct the actual expenses or take the standard mileage deduction rate, which is $0.655 per mile in 2024. Track your mileage carefully to ensure accuracy.

Health insurance premiums

Self-employed individuals may be able to deduct their health insurance premiums, which can be a significant benefit.

Retirement contributions

Sole proprietors can also set up a retirement plan, like a SEP IRA, and contribute a percentage of their earnings. This reduces your taxable income while enabling you to save for the future.

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How to simplify your tax management as a sole proprietor

To help keep your tax burden manageable and ensure compliance, here are a few steps you can take:

Separate your business and personal finances. Open a dedicated business bank account to streamline your income and expense tracking. This makes it infinitely easier to identify deductions and stay organized for tax purposes.

Stay up-to-date with tax law changes. Tax regulations change frequently. Staying informed about new deductions, tax rate adjustments, or IRS rules will help you make the most of every tax season.

Work with a tax professional. Even for the most organized individuals, taxes can be complex. A tax advisor can provide personalized insights on your financial picture and help you identify potential savings you might otherwise miss.

If you provide services to businesses, Remote’s Freelancer Hub can also help. It enables you to easily track all your invoices and manage all of your documents in one place, making it quick and painless to calculate your quarterly income.

To learn more about how Freelancer Hub can simplify your business management, speak to one of our friendly experts today.