Recent Posts:Tax essentials for sole proprietorsMany small businesses start out as sole proprietorships. This business structure is relatively simple and inexpensive to establish and maintain. It also gives you direct access to your business profits without having to take formal distributions. However, being self-employed also means your taxes can be more complicated than they were when you were a W-2 employee. Here are some of the federal tax issues to keep in mind if you operate your business as a sole proprietor. Reporting your business income and expensesAs a sole proprietor, you generally report your business income and expenses on Schedule C of your personal tax return (Form 1040). Your business’s net income is taxable to you whether or not you actually take the money out of the business. Business expenses are generally deducted from your business income rather than claimed as itemized deductions. If your business has a loss, you may generally be able to deduct that loss against your other income. However, special rules may limit your deduction in certain situations, including:
Potential deductions for sole proprietorsSole proprietors may qualify for certain deductions that generally aren’t available to other individual taxpayers. For example, you may qualify for an above-the-line deduction for self-employed health insurance premiums. This may include premiums for medical, dental, and qualifying long-term care coverage, subject to certain limitations. Because this is an above-the-line deduction, your deduction for qualifying health insurance premiums isn’t subject to the rules that limit itemized deductions for medical expenses. Home office expensesYou may also be able to deduct certain expenses for a home office if you meet the requirements. Generally, your home office must meet one of these conditions:
In general, the space must be used regularly and exclusively for business purposes to qualify. The home office deduction may include a portion of expenses such as:
You may also choose a simplified method based on the square footage of the qualifying space. Depending on your situation, you may also be able to deduct travel expenses from your home office to another work location. Keep good recordsGood recordkeeping is important. Complete records of your income and expenses are needed to support the tax deductions you’re claiming. Some expenses require additional documentation or are subject to special rules and limits. This includes expenses such as:
Keeping organized records throughout the year can make tax filing easier and help ensure you’re able to claim the deductions you may be entitled to. Understanding the QBI deductionAs a sole proprietor, you might also qualify for the Section 199A qualified business income (QBI) deduction. The deduction generally equals 20% of qualified business income, although it can’t exceed 20% of taxable income. QBI generally includes the net amount of qualified income, gains, deductions, and losses connected with operating a U.S. business. Certain investment income and reasonable compensation paid to an owner for services provided to the business aren’t included in QBI. The QBI deduction is taken below the line, meaning it reduces taxable income rather than gross income. You can claim the deduction even if you don’t itemize your deductions and instead take the standard deduction. QBI income limitsThe QBI deduction can be subject to additional limitations at higher income levels. For 2026, these limitations generally begin to apply when taxable income, calculated before the QBI deduction, exceeds:
For 2026, these limitations are fully phased in once taxable income exceeds:
The specific limitations that apply can depend on your situation, so it’s important to discuss them with your tax professional. Changes to the QBI deductionThe One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent. Starting in 2026, the OBBBA also expands the income ranges over which the QBI limitations phase in, potentially allowing larger deductions for some taxpayers. The law also provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business and have at least $1,000 of QBI from that business. The minimum deduction will be adjusted annually for inflation after 2026. Planning for self-employment taxesOne of the biggest differences between being an employee and owning your own business is self-employment tax. Self-employment taxes are essentially the equivalent of federal payroll taxes for employees. However, self-employed individuals generally pay both the employer and employee portions. Self-employment taxes are paid in addition to your federal income tax. However, you can generally deduct half of your self-employment tax as an adjustment to income. For 2026, the self-employment tax rate is 15.3% for Social Security and Medicare taxes on net earnings from self-employment up to $184,500. Above $184,500, the 2.9% Medicare tax generally continues to apply to the excess. An additional 0.9% Medicare tax applies to self-employment income above:
The additional Medicare tax threshold isn’t adjusted for inflation. Consider a tax-advantaged retirement planIf you’re self-employed, you may also want to consider establishing a qualified retirement plan. These plans can offer two key tax advantages: contributions may be deductible when they’re made, and the money generally isn’t subject to income tax until it’s withdrawn. SEP plansOne option is a Simplified Employee Pension (SEP) plan. SEP plans generally require minimal paperwork and may allow you to make deductible contributions for a tax year as late as the due date of your income tax return for that year, including extensions. Contribution amounts are discretionary, and annual contribution limits are relatively high. However, if you have employees, they generally must be included in the plan if they work enough hours and meet the other qualification requirements. Traditional IRAsIf you don’t establish a qualified retirement plan, you may still be able to contribute to a traditional IRA. However, the annual contribution limit will generally be significantly lower than the limits available through some self-employed retirement plans. Plan for quarterly estimated taxesThe federal tax system generally works on a “pay as you go” basis. That means you may need to make estimated tax payments throughout the year rather than waiting until you file your annual tax return. Estimated payments generally need to cover both:
Estimated taxes are generally calculated using Form 1040-ES. Quarterly payments are generally due:
If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day. It’s important to pay enough by each deadline. If you don’t, you may owe interest and penalties. Do you need an EIN?Sole proprietors don’t automatically need an Employer Identification Number (EIN). For federal tax purposes, you can generally use your Social Security number unless you have employees. However, you may also need an EIN if your business:
Even if you aren’t required to have one, you may want to obtain an EIN for banking or other administrative purposes. An EIN is available at no cost through the IRS website. To apply, you’ll need to provide identifying information, including a valid Social Security number or other taxpayer identification number, along with information about your business. Eligible U.S. applicants generally receive an EIN immediately after completing the online application. You can also apply by submitting Form SS-4 by fax or mail. We can helpEven if your business is small, tax compliance and planning can be a big responsibility. These are just some of the federal income tax issues that sole proprietors may face. Depending on your business and location, state and local income, sales, payroll, and other tax requirements may also apply. If you have questions about your business taxes, reporting requirements, recordkeeping, or available tax deductions, our entire Padgett network is here to help. Contact your local Padgett office to learn more about the tax considerations that may apply to your business. The post Tax essentials for sole proprietors appeared first on Padgett. 09/03/2026
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