A sole proprietorship is the simplest way to run a business. There is nothing to form: if you sell goods or services on your own and don't register an entity, you are a sole proprietor. Business profit is your personal income.
How sole proprietors are taxed
| Tax | Rate | Applies to |
|---|---|---|
| Federal income tax | 10% to 37% | Net profit after deductions |
| Self-employment tax | 15.3% (12.4% Social Security + 2.9% Medicare) | 92.35% of net earnings, Social Security part up to the wage base |
| Additional Medicare tax | 0.9% | Earnings above $200,000 single / $250,000 joint |
| State income tax | 0% to 13.3% | Varies by state |
Example: $100,000 net profit, single filer, no state tax
| Item | Amount |
|---|---|
| Net profit (Schedule C) | $100,000 |
| Self-employment tax (15.3% × 92.35%) | $14,130 |
| Deduction for half of SE tax | ($7,065) |
| Standard deduction 2026 | ($16,100) |
| QBI deduction (20% of qualified income, simplified) | ($15,367) |
| Taxable income | $61,468 |
| Federal income tax | ~$8,235 |
| Total federal tax | ~$22,365 (22.4%) |
Deductions sole proprietors use
- Home office: $5 per square foot up to 300 square feet, or actual expenses
- Vehicle: business miles at the IRS standard mileage rate, or actual costs
- Equipment: Section 179 and 100% bonus depreciation
- Health insurance: self-employed health insurance premiums are deductible above the line
- Retirement: SEP-IRA contributions up to 25% of net earnings, or a Solo 401(k)
- Software, subscriptions, travel and 50% of business meals
Estimated taxes
No employer withholds tax for you, so you pay quarterly using Form 1040-ES. Missing payments triggers an underpayment penalty calculated like interest.
When to move on from a sole proprietorship
- Liability: Your personal assets are exposed to business debts and lawsuits. An LLC separates them.
- Profit above roughly $80,000: An S corp election can cut self-employment tax.
- Raising money: Investors need a corporation.
Sole traders outside the US
- UK: Sole traders pay income tax (20% to 45%) and Class 4 National Insurance (6% between £12,570 and £50,270, then 2%).
- Germany: Freelancers (Freiberufler) pay income tax up to 45% plus solidarity surcharge; tradespeople also pay trade tax above €24,500.
- Australia: Sole traders pay personal income tax and must register for GST once turnover reaches A$75,000.
Compare personal and business taxes across countries with our calculators.
Frequently Asked Questions
How much tax does a sole proprietor pay?
A sole proprietor pays federal income tax at personal rates (10% to 37%), self-employment tax of 15.3% on 92.35% of net earnings up to the Social Security wage base, and state income tax where applicable. Half of self-employment tax is deductible, and most sole proprietors can also take the 20% QBI deduction.
Do sole proprietors need to make quarterly tax payments?
Yes, if you expect to owe $1,000 or more in federal tax for the year. Payments are due around April 15, June 15, September 15 and January 15. Paying at least 100% of last year's tax (110% if AGI exceeded $150,000) avoids underpayment penalties.
Is a sole proprietorship or LLC better for taxes?
A single-member LLC is taxed the same as a sole proprietorship by default. The LLC adds liability protection and the option to elect S corp status, at the cost of state filing fees and annual reports.