If you run a sole proprietorship, you and your business are one taxpayer in the eyes of the IRS. Instead of filing a separate business tax return, your profit flows onto your personal income tax return (called pass-through taxation), where you account for income tax and self-employment tax.
And since you're the boss, there's no employer withholding taxes from your pay. Because of the IRS’s pay-as-you-go system, you'll typically pay the IRS in quarterly installments through the year instead of one lump sum in April.
Here's how to know what you owe in sole proprietorship taxes, when you owe it, and deductions that can reduce the bill.
What types of taxes do I owe as a sole proprietor?
As a sole proprietorship, you have to pay income tax and self-employment tax, which are calculated from Schedule C. It reports your business's profit or loss, and that net profit figure is the business income you're taxed on.
Federal income tax
When you are working on your Form 1040, use Schedule C to total your business revenue, subtract your expenses, and arrive at your sole proprietorship’s net profit. This number gets added to any other business or personal income you have.
Example: If your business profited $25,000 and you also earned $50,000 as a traditional W-2 employee at another company, your total income would be $75,000. After that, your taxable income is what's left after you subtract any deductions or adjustments you qualify for.
If your sole proprietorship is a side hustle, don’t forget that tax brackets are marginal. Your business profit stacks on top of your other income and gets taxed at your highest rate, not the average rate you were paying before.
State income tax
Most states tax your business profit the same way the federal government does: it flows onto your personal state return, and there's no separate business-level return to file. Your state's rates and brackets differ from the federal ones.
A few things that vary:
Some states have no individual income tax at all.
Some states levy a tax on gross receipts or the privilege of doing business, separate from income tax.
If you do business in more than one state, or you have customers or employees outside your home state, an accountant can tell you where you have filing obligations. Most single-state sole proprietors, though, are looking at one extra return and nothing more.
Local income tax
Some cities, counties, and school districts levy their own income tax, and your business profit is generally part of what they tax. If your municipality has one, you'll typically file a separate local tax return. They’re easy to miss, but a quick call to your city or township is usually all it takes to find out.
Self-employment tax
You'll also owe self-employment tax (Social Security and Medicare contributions) once your earnings reach $400. When you're paid as a W-2 employee, your employer covers half of these taxes, but sole proprietors pay the whole thing.
The self-employment tax rate is 15.3%, and you calculate those taxes on Schedule SE. Unlike your federal income tax, self-employment tax applies to your net earnings from self-employment, which is 92.35% of the net profit on your Schedule C.
Here's how the 15.3% breaks down in 2026:
Tax | Self-Employed Rate | Applies to |
Social Security | 12.4% | First $184,500 of net earnings |
Medicare | 2.9% | All net earnings, no cap |
Additional Medicare Tax | 0.9% | Combined wages and self-employment income over $200,000 ($250,000 if married filing jointly) |
There is a real upside here. You can deduct half of your self-employment tax as an adjustment to your income, and every business expense you claim lowers it.
If you also have a W-2 job, those wages count toward the same $184,500 Social Security limit.
How do I calculate and pay my quarterly estimated taxes?
If you expect to owe $1,000 or more in tax for the year, you generally need to make estimated payments. Here’s how to do that.
1. Calculate taxes with the Form 1040-ES worksheet
The Form 1040-ES worksheet walks you through estimating both your federal income tax and your self-employment tax for the year, then splits it into four payments.
If projecting this year's income feels like guesswork, there's a shortcut if you filed a tax return last year. Take the total tax you owed last year, divide it by four, and pay that each quarter. As long as you pay in at least 100% of last year's tax, or 110% if your adjusted gross income was over $150,000, the IRS won't charge you an underpayment penalty. If you owe more this year, you’ll still owe the difference when you file, but you won't be penalized for the shortfall.
2. Make payments quarterly to the IRS
The fastest options are IRS Direct Pay or your IRS Online Account, both free from a bank account. Payments are due four times a year:
January 1–March 31: due April 15
April 1–May 31: due June 15
June 1–August 31: due September 15
September 1–December 31: due January 15 of the following year
If a due date falls on a weekend or legal holiday, it moves to the next business day.
Tip: If you or your spouse has a W-2 job, you can increase withholding there to get your balance due below $1,000, instead of making quarterly payments. Either of you can submit a new Form W-4 and ask for extra withholding.
What about state estimated quarterly taxes?
If your state has an income tax, you'll likely owe estimated tax payments there too, and most states follow the federal due dates. Some cities with local income taxes require their own. Check with your state's department of revenue if you're not sure. If you're already paying federal estimates on schedule, adding a state payment to the same routine is straightforward.
What business expenses can sole proprietors deduct?
This is where sole proprietors have a real advantage over W-2 employees. You can deduct expenses that are common in your line of work and genuinely helpful in running it, and every one lowers your net profit. Since net profit is the base for both your income tax and your self-employment tax, each deduction reduces two bills at once. You might have these business expenses:
Home office. Use the home office deduction if a room in your home is used regularly and exclusively for business—either a flat rate per square foot, or a percentage of your rent or mortgage interest, property taxes, utilities, and insurance.
Vehicle expenses. Deduct business mileage at the standard rate or track actual costs like gas and repairs. Commuting to a regular workplace doesn't count.
Startup costs. In your first year, costs from before you opened—market research, legal fees, training—are deductible up to $5,000.
Everyday operating expenses. Office supplies, software, professional services, advertising, and business insurance. Business meals are limited to 50%.
As a sole proprietor, it can be easy to mix up personal and business finances. Careful bookkeeping helps at tax time, and a separate business account does most of that work for you.
What if I have employees?
Hiring your first employee is a big step. It also changes a few things on the tax side that are specific to sole proprietors.
You'll need an Employer Identification Number (EIN). Without employees, you can file using your Social Security number; once you're paying someone, you need an EIN.
You'll be responsible for withholding income and payroll taxes from your employees' paychecks, paying the employer share of Social Security and Medicare (FICA), and handling federal and state unemployment taxes (FUTA and SUTA). These work the same for every employer regardless of business structure.
Also, this is the part we handle! Gusto calculates withholdings, files your payroll taxes, and keeps up with rate changes in your state—so hiring your first employee doesn't mean learning a new tax system.
Two things that are different for sole proprietors:
You're not one of your employees. You pay yourself through owner's draws, not payroll, and you still owe self-employment tax on your profit rather than having FICA withheld.
Hiring family comes with a tax break. Wages you pay your own child under 18 are exempt from FICA, and wages to a child under 21 are exempt from FUTA. A spouse's wages are exempt from FUTA but still subject to FICA. These exemptions exist because you're a sole proprietorship—they go away if you incorporate. Income tax withholding still applies in every case. It can be a popular move: Gusto's data shows the share of small businesses employing an owner's child grew by more than 50% between 2018 and 2025.
Paying independent contractors is simpler. You generally don't withhold or pay taxes on their behalf. Starting with 2026 payments, you file a Form 1099-NEC for any contractor you pay $2,000 or more during the year (some states set lower thresholds than the federal one). Collect a W-9 before you make the first payment, since you won't know in March whether someone will cross $2,000 by December.
How can I reduce my sole proprietorship taxes?
While nothing is certain but death and taxes, you may be able to lower what you owe with some of these tips. For an even bigger list, see our guide to self-employment tax deductions.
Make retirement contributions
A SEP-IRA or a solo 401(k) both let you deduct what you contribute. This is the one deduction where you choose how much, which can make it the biggest income tax savings opportunity most profitable sole proprietors have. For 2026, the combined contribution limit is $72,000 for either plan if you're under 50. Gusto's Solo 401(k) is built for owner-only businesses, and it can scale into a standard 401(k) if you hire.
Deduct your health insurance premiums
Premiums for you, your spouse, and your dependents are deductible as an adjustment to your income. The deduction is capped at your net profit from the business, after certain other deductions, and you can't claim it for any month you were eligible for a subsidized plan through a spouse's employer.
See if you can take the qualified business income deduction
As a sole proprietor, you can generally deduct up to 20% of your business profit to lower your taxable income. This deduction is earned simply for having pass-through business income.
Elect S-corp status
If you elect to be taxed as an S corporation, you pay yourself a reasonable salary (that reflects what the work is actually worth) subject to payroll taxes. You then take the remaining profit as distributions, which aren't subject to self-employment tax. It's the only move here that lowers self-employment tax rather than income tax.
Keep in mind it only makes sense above a certain profit level, since you'll have expenses from running payroll and filing a separate business return. Our guide to using an S corp to reduce self-employment taxes walks through the math.
FAQs
How much should I set aside for taxes as a sole proprietor?
Set aside 30% of your net profit as a starting point. That covers the 15.3% self-employment tax plus federal income tax at your bracket. Adjust up if you're in a higher bracket, filing jointly with a high earner, or in a state with income tax.
What if I don’t pay quarterly estimated taxes?
You'll likely owe an underpayment penalty. And watch out, because it isn't a flat fee—the IRS calculates it like interest on the amount you were short, at a rate it adjusts quarterly, accruing from the date each payment was due. Paying something every quarter costs less than settling up in April.
Do sole proprietors have to pay payroll taxes?
Not on their own income. Sole proprietors pay self-employment tax instead, which is 15.3% covering Social Security and Medicare, calculated on Schedule SE. If you hire employees, you owe employer payroll taxes on their wages and withhold their share. But you never put yourself on payroll.
Can I pay myself a salary as a sole proprietor?
No. You pay yourself through an owner's draw, which is money moved out of the business account. Draws aren't wages, aren't deductible, and aren't a separate taxable event. You're taxed on your business's net profit whether you withdraw it or leave it in the account.
Are sole proprietorships and single-member LLCs taxed differently?
No, not by default. The IRS treats a single-member limited liability company (LLC) as a disregarded entity—a pass-through entity whose profit lands on your personal return—so you file the same Schedule C and owe the same self-employment tax. An LLC gives you liability protection, not a tax break. Either one can elect S-corp taxation, which is a separate decision that changes how you're taxed.
