How sole proprietors are taxed

Sell your first logo design or take your first freelance gig without forming anything, and you're already a sole proprietor. It's the default. The business files no return of its own and pays no tax of its own. Its profit lands on your personal Form 1040, where it gets hit twice: once by income tax, once by self-employment tax.

Form a single-member LLC and, by default, nothing about that changes. Publication 334 lets the owner use Schedule C if the owner is an individual and the LLC is not engaged in farming. So read everything below as covering both.

Schedule C

The business side of your return is Schedule C, for income or loss from a business you run as a sole proprietor. Put income at the top. Subtract deductible expenses. Whatever net profit is left moves over to Form 1040.

What can you deduct? Ordinary and necessary costs of running the business. Think printer paper, a Figma or Adobe subscription, the business share of your phone bill, miles driven for work, and a home office if it meets the rules. Publication 334 goes through them one by one. Money you pay yourself doesn't count. Draw $5,000 or $50,000 and the tax is still on the profit.

Self-employment tax

Self-employment tax is your Social Security and Medicare, paid by you alone. Topic 554 charges 12.4% for Social Security plus 2.9% for Medicare. That 15.3% applies to 92.35% of net earnings, and it starts at $400.

Social Security tops out at the 2026 wage base of $184,500. Schedule SE is where the math happens. Half the tax comes off when you work out adjusted gross income.

At modest profit it is usually a bigger bill than federal income tax, which catches a lot of first-year freelancers out. Cutting it is the whole point of an S election.

The QBI deduction

The IRS QBI page lets a sole proprietor deduct up to 20% of qualified business income, but never more than 20% of taxable income minus net capital gain. Below $201,750 of taxable income ($403,500 joint) in 2026, the type of business doesn't matter. Above it, service businesses and businesses with no employees start to lose it. It lowers income tax only, not self-employment tax.

Worked example: $60,000 of profit

Take a single freelancer living in a state with no income tax. Schedule C shows $60,000 of profit for 2026, and there's no other income.

Roughly $1 in every $5 of profit goes to federal tax, and about 70% of that bill is self-employment tax. A cent or two can differ from your return because the IRS forms round at different steps.

Paying during the year

Nobody withholds tax from a sole proprietor's profit, so you send it in yourself. Expect to owe $1,000 or more at filing time? Then the 2026 Form 1040-ES says you generally have to make estimated payments. The 2026 due dates:

The freelancer above would pay about $3,009 each quarter. Pay too little and the IRS charges a penalty that works like interest. See the estimated taxes guide for the safe harbor rules.

State taxes

States with an income tax tax the same profit, and a few add their own taxes. A sole proprietor pays no state franchise tax in most states, since there is no entity. That is one cost difference with an LLC: California's $800 annual LLC tax, for example, applies to the LLC and not to a sole proprietor doing the same work.

When to look at something else

A sole proprietorship has no liability shield. Your business debts are your debts. And as profit grows, the self-employment tax on all of it is the line that the S corp election attacks. Enter your profit and state in the calculator to see where the sole proprietor line stops being cheapest.