A sole proprietorship is the default tax treatment for one person doing business without an entity, or through a single-member LLC that has not elected corporate status. There is no separate business tax return: income and expenses go on Schedule C of the owner's Form 1040, and the net profit is taxed at personal rates plus 15.3% self-employment tax. It is the simplest and cheapest structure to run, with no payroll requirement for the owner and no separate filing deadline. The tradeoffs are the full self-employment tax bite on every dollar of profit, no liability shield unless an LLC is used, and audit rates for Schedule C filers that historically run higher than for entities. Many owners start here and convert to an S corporation once profits consistently exceed the point where payroll tax savings outweigh the added compliance cost.
Sole Proprietorship
Primary authority: IRC §61; Schedule C (Form 1040)
The authority behind it
IRC §61; Schedule C (Form 1040)
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A freelance designer with $85,000 of net Schedule C profit owes income tax at her marginal rate plus roughly $12,000 of self-employment tax, half of which she deducts above the line.
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See what this means on your own income with the free self-employment tax calculator.
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Related terms
Self-Employment Tax
Self-employment tax is Social Security and Medicare for people who work for themselves: sole proprietors,...
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S Corporation
An S corporation is a corporation or an LLC that elects corporate treatment that has filed a valid election under...
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Limited Liability Company (LLC)
An LLC is a state-law entity that gives its owners a liability shield while leaving federal tax treatment up to an...
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Quarterly Estimated Taxes
Quarterly estimated taxes are the prepayments the IRS requires from anyone who earns income with no tax withheld...
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