Starting a business as a sole proprietorship can be simple and cost-effective. However, operating as a sole proprietor comes with important federal tax responsibilities that business owners need to understand.

Unlike employees who have taxes withheld from their paychecks, sole proprietors generally must manage their own income taxes, self-employment taxes, deductions and estimated payments.

Here are several key tax considerations to keep in mind.

Reporting Sole Proprietorship Income and Expenses

Sole proprietors generally report their business income and expenses on Schedule C (Form 1040), Profit or Loss From Business. The resulting net business income is generally taxable to the owner, whether or not the money is withdrawn from the business.

Business expenses are generally deducted from business income rather than claimed as itemized deductions. Depending on the circumstances, business losses may also be deductible against other income, although special limitations can apply.

Keeping accurate records throughout the year is essential. Proper documentation can help support deductions and make tax filing easier.

Common Sole Proprietor Tax Deductions

Sole proprietors may qualify for deductions that can reduce taxable income, including:

• Business-related operating expenses
• Self-employed health insurance premiums, subject to applicable limitations
• Qualified home office expenses
• Certain business travel and meal expenses
• Automobile expenses related to business use
• Retirement plan contributions

Some deductions have specific eligibility requirements and recordkeeping rules. For example, a home office generally must be used regularly and exclusively for business and meet IRS requirements.

Understanding the Qualified Business Income Deduction

The qualified business income (QBI) deduction, also known as the Section 199A deduction, can provide an additional tax benefit to eligible sole proprietors.

Generally, eligible taxpayers may be able to deduct up to 20% of qualified business income. The deduction is available even if the taxpayer takes the standard deduction rather than itemizing.

For 2026, additional limitations can apply as taxable income increases. The rules can also vary based on the type of business and other factors.

The One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent and made several changes beginning in 2026, including expanded phase-in ranges and a new minimum deduction for certain taxpayers with qualifying business income.

Because the QBI deduction can be subject to complex limitations, business owners should work with a qualified tax professional to determine how the rules apply to their situation.

Paying Self-Employment Tax

One of the biggest tax differences between being an employee and being a sole proprietor is self-employment tax.

Self-employed individuals generally pay both the employer and employee portions of Social Security and Medicare taxes. Half of the self-employment tax is generally deductible as an adjustment to income.

Self-employment tax is separate from federal income tax, so sole proprietors need to account for both when planning their tax payments.

Consider a Tax-Advantaged Retirement Plan

Sole proprietors may also be able to reduce their taxable income while saving for retirement by establishing a tax-advantaged retirement plan.

A Simplified Employee Pension (SEP) plan is one option. SEP plans generally involve minimal administrative requirements and can allow for significant contributions.

Depending on your circumstances, other retirement options may also be available. Business owners should consider contribution limits, eligibility requirements and whether they have employees before selecting a plan.

Make Quarterly Estimated Tax Payments

Because taxes generally aren’t withheld from business income, sole proprietors may need to make quarterly estimated tax payments.

Estimated payments generally account for both federal income tax and self-employment tax and are typically calculated using Form 1040-ES.

The general quarterly payment dates are:

• April 15
• June 15
• September 15
• January 15 of the following year

If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day.

Making timely and sufficient estimated payments can help business owners avoid unexpected tax bills and potential penalties.

Does a Sole Proprietor Need an EIN?

A sole proprietor doesn’t automatically need an Employer Identification Number (EIN). In certain situations, a business owner may be able to use their Social Security number for federal tax purposes.

However, an EIN may be required if the business has employees or certain employment, excise or retirement plan tax obligations. Business owners may also choose to obtain an EIN for banking or administrative purposes.

The IRS provides EINs at no cost through its online application process.

Apply for an EIN through the IRS

Keep Accurate Business Tax Records

Good recordkeeping is one of the most important parts of managing sole proprietorship taxes.

Maintain documentation for business income and expenses, particularly for expenses that have additional substantiation requirements or deduction limitations, such as:

• Automobile expenses
• Travel
• Meals
• Home office expenses
• Business equipment and other assets

Accurate records can help substantiate deductions and provide the information needed to prepare your tax return.

IRS Guide to Small Business Taxes and Records

Plan Ahead for Your Sole Proprietorship Taxes

Running a sole proprietorship may offer simplicity and flexibility, but it also comes with significant tax responsibilities. From tracking deductible expenses and paying self-employment taxes to making estimated payments and evaluating retirement options, proactive tax planning can help you avoid surprises.

State and local tax obligations may also apply depending on where your business operates.

Let THF Help With Your Business Tax Needs

Whether you’re starting a business, managing an established sole proprietorship or looking for ways to improve your tax strategy, THF’s tax professionals can help you understand your obligations and identify planning opportunities.

Contact THF today to learn how we can help you navigate your business tax responsibilities with confidence. Click here.