Steps to determine how a sole proprietorship pays taxes

Written By Gary Spirer Published March 29th, 2010

How does a sole proprietor handle taxes during tax season? Find out.

Step 1 Determine what is a sole proprietor?

A sole proprietorship is a form of business; however it is owned by just one individual and is identified using the individual’s information – such as his or her social security number or tax id number. A sole proprietorship has an owner which is usually identified as being self-employed.

Step 2 Understand the problem associated with sole proprietors

The problem often associated with sole proprietorships is that the business is directly connected to the individual. If the business is sued or liable, the person/individual is completely liable. Therefore, the business owners property (house, car, etc) – even the things not directly associated with the business – are technically at risk.

Step 3 Understand Form 1040 and Schedule C for sole proprietors

A sole proprietor is taxed through the personal tax returns known as the 1040 form. The business profit is calculated and presented on this form. It is the Schedule C. To complete the Schedule C, the income and allowable expenses for the business have to be listed and calculated into a net income of profit or loss for the business. If the business happens to have a loss for the year, no self-employment taxes are due. However, if the business shows a profit, taxes will be due to the Internal Revenue Service. The owner of the business, that is, the individual, will be solely responsible for paying these taxes. If for some reason the individual owns and business and works for another company, both sets of numbers will need to be calculated and reported so that the appropriate amount of taxes can be paid.

It is that simple. Remember, being a sole proprietor has its benefits when it comes to taxation. Please visit for more great business advice.

1 Comment

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