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Bottom Line Up Front

  • In addition to annual income tax, sole proprietors also need to estimate quarterly taxes. 
  • Sole proprietors need to report income and deductions correctly to avoid tax penalties.
  • There are a variety of IRS forms sole proprietors need to familiarize themselves with.

Time to Read

4 minutes

August 19, 2022

One of the costs of doing business is paying business taxes. As a sole proprietor, you’re likely required to file a tax return by April 18, 2023, which is the same deadline for individuals this year. If this is your first time filing business taxes, you’ll need to get acquainted with some new tax forms (see table below). The following tips can help you avoid tax blunders sometimes made by sole proprietors.*

1. Pay Estimated Taxes Quarterly

Tax time isn’t just once a year for businesses; you must pay estimated taxes each quarter.* As a sole proprietor, you should use Form 1040-ES to calculate and pay your estimated tax. If you don’t pay enough through estimated tax payments, you may be charged a penalty. Even if you’re due a refund when you file your tax return, you may be charged a penalty if you don’t pay enough by the due date of each payment period.

2. Report All Business Income

If you receive income that’s connected to your business, it’s considered business income. Business income usually takes the form of cash, checks and credit card charges. However, it can take other forms, too, such as property or services. In those cases, you must report the fair market value of the property or services you received. 

For example, if your catering service is hired by a local farmer who pays you with 10 dozen eggs a week for a year, you must report the value of the eggs. The Internal Revenue Service (IRS) compares the information reported by banks, businesses and other payers with the income you report on your income tax return. If the IRS believes you’ve underreported income, it will send you a notice with proposed changes to your tax. You may owe interest and/or a penalty.

3. Choose a Method for Taking the Home Office Deduction, If You Qualify

If you use part of your home exclusively for business on a regular basis, you may be able to deduct expenses for the business use of your home. There are two methods:

  • Regular method: Calculate the actual expenses for your home office based on the percentage of your home devoted to business use.
  • Simplified method: Deduct $5 per square foot of your home used for business, up to 300 square feet. 

4. Take the Proper Deduction for Business Gifts

You can deduct all or part of the cost of gifts given in the course of your trade or business, but only up to $25 per person. So, if you give $25 gifts to 10 people, you can deduct $250. If you give $50 gifts to 10 people, you can still only deduct $250 (the first $25 of each individual gift).

5. Deduct All Business Expenses

According to the IRS, to be deductible, a business expense must be both ordinary and necessary. You should track all your expenses, large and small, throughout the year rather than try to gather a year’s worth of receipts when the tax deadline rolls around. See Publication 535 for more about deducting business expenses.

Understand Your Situation Before You File

After a sweeping overhaul of the U.S. tax code in 2017 (Tax Cuts and Jobs Act), it’s essential to review your tax situation for potential changes and new opportunities to reduce your tax burden. For help with tax-saving strategies for small businesses, consult with a qualified tax professional. 

Tax Forms to File

If you’re liable for…Use Form:
Income tax1040 and Schedule C or C-EZ
Self-employment taxSchedule SE
Estimated tax1040-ES
Social Security and Medicare taxes and income tax withholding941 or 944, W-2 (to employee)
Providing information on Social Security and Medicare and income tax withholdingW-2 and W-3 (to the Social Security Administration)
Federal unemployment (FUTA) tax940

Next Steps Next Steps

  1. Make sure you’re filing as a sole proprietor in the eyes of the IRS. This means you’re not employed by anyone else, and that you operate as a single-person business entity, such as a freelancer.
  2. Gather all the forms and resources you need to stay tax compliant (table above). Then, set calendar reminders for yourself when it comes to filing estimated quarterly taxes, as well as annual personal income taxes. 
  3. If you’re not confident in determining your deductions, filling out tax forms or staying on top of IRS filing deadlines, seek out a tax advisor who specializes in working with sole proprietors. 


*Certain exceptions apply. See your tax advisor for details. 

This article is intended to provide general information and should not be considered tax advice. Please consult a tax professional for more information.

This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.