Key Tax Tips That Sole Proprietors Should Follow

When you run a business as a sole proprietor, you enjoy the freedom of running it your own way. While you can take your decisions independently, the responsibilities are also all yours. There are certain implications from the tax perspective as well. The IRS tax norms consider the business and the sole proprietor as a single entity. This means that you will be taxed differently, with some additional taxes as well as extra reporting requirements. At the same time, you may also be eligible to claim certain tax deductions. This sounds confusing, doesn’t it? It’s enough to make your head spin. Obviously, you will need to brush up your tax basics if you want to comply with the tax norms properly. Click here for some key tax tips and facts that sole proprietors should follow.

Business expenses

Like any business entity, a sole proprietorship business to have operating expenses. These are the ones that they need to incur as a part of the normal running of the business. The IRS lets you claim them on the tax return, provided that they consider them as “ordinary and necessary”. The common expenses that come under this category include the cost of equipment, health insurance, travel and business meals, capital assets, rent, utilities, and subscriptions.

If you are running your sole proprietorship business out of your home, the IRS lets you claim the home office deduction. The deduction related to mortgage cost, utilities, office expenses, travel expenses and more. However, you need to prove that you are using a particular part of your living space exclusively for running your business.

Health insurance deduction

When you run a business as a sole proprietor, you can make a deduction for the cost of health insurance as well. In fact, the deduction is permissible for yourself, your spouse and even your dependents. Moreover, you can claim this deduction even without itemizing deductions on your tax return. Essentially, health insurance deduction is regarded as an above-the-line deduction, which implies that you can take it off the gross income before reaching the adjusted gross income. Other deductions, conversely, are below-the-line deductions.

At the same time, you need to remember that the deductions are limited by the amount of taxable income. In that case, you cannot claim the health insurance deduction if you show a loss on your business. Another situation when you cannot take health insurance deduction is when you or your spouse is getting group health insurance with an employer.

Self-employment tax

If you run a sole proprietorship, you are responsible for paying the self-employment tax as well. This has to be paid over and above the regular income tax, which might seem like a lot. However, you have to abide by the tax norms and ensure that you pay up everything that is due to stay out of trouble. It is best to seek advice from a seasoned tax law attorney in this context if you do have any kind of confusion. They can guide you about the A to Z of self-employment tax and everything that comes under its scope and coverage.

Another avenue to consider would be contacting a tax resolution team that could help you work through any tax queries that you have, as this can be a daunting task on your own.

Self-employment taxes refer to the Social Security and Medicare taxes which both employers and workers have to pay to the IRS. When you are employed with a business, you have to pay the employee’s share of these taxes, which is exactly half. The employer has to pay the other half. On the other hand, sole proprietors have to pay both these halves. Obviously, this accounts for a higher tax burden but you can also claim a deduction for half of the self-employment taxes.

Records and audits

Another key aspect of taxes for sole proprietors is their returns because the IRS tends to be more vigilant about them. Although the personal and business taxes are combined (because you are considered the same as the business from the tax perspective), the authorities still expect accurate and distinct business records from you. For example, they would ask for proper proof about a business asset being used exclusively for business operations if you are claiming a deduction for it.

At the same time, there are high chances of getting an IRS audit notice if your expenses consistently exceed your income. If you have shown losses in at least three of the recent five years, you may expect additional IRS scrutiny. It is best to have the situation handled by a tax attorney because they understand what goes into dealing with an audit notice.

When you run a business as a sole proprietor, you need to be extra careful about filing your returns and paying up taxes. A proper understanding of the aforementioned aspects can keep you out of tax trouble.


  • Tamra Phelps

    Ugh, taxes. No one likes filling them out or paying them, lol. But you might as well get all the deductions you can, so the effort is worth it.

  • Rosie

    I’d want to have a good software package. I used to think Quickbooks would be good if you had your own biz, I don’t know what off-the-shelf products people use now.

  • Tamra Phelps

    I think taxes are probably one of the most difficult things new businesspersons deal with. It can be hard to follow all the regulations and get yourself the best results. It’s probably worth it to let a professional do your taxes.

  • Rosie

    There is a lot of red tape to have a legit biz, and I think often people romanticize what it is like. Also, some states are worse than others for taxes.

  • Crystal K

    Taxes are so complicated in the USA – we lives in Singapore for several years and I couldn’t believe how straightforward taxes were there!!

  • Diane Brimmer

    When we ran our honey business, we found out just how much is entailed. Self employement ,equiptment expenses, milage expenses, lodging, licenses, inspections, lot fees, and income tax expenses. A lot of work but still a lot of fun. We did markets 6 days a week and on the 7th we got ready for the next week. I enjoyed seeing and meeting different people. Teaching was a favorite about the process of the bees to the honey. I still miss it but all things must come to an end.

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