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Taxes Paid by Sole Proprietorships

A List of the Taxes Paid by Sole Proprietors


Taxes Paid by Sole Proprietorships

A Sole proprietorship is a business operated by an individual owner. This type of business is considered a "disregarded entity" because the business is not disregarded when considering the owner's personal financial status. Sole proprietorships are also considered "pass through" entities, because the profits or losses of the business pass through to the owner's personal tax return.

Here are the taxes paid by a sole proprietorship:

Federal and State Income Taxes
Since the sole proprietor's business is not separate from his or her personal finances, the business taxes are determined by using a Schedule C from the individual's Form 1040 for federal income taxes. The Schedule C profit or loss is added in with other income by the owner and spouse, to determine the amount of tax payable. For example, if the owner has a business loss of $1,000 and other income of $50,000, the total income for tax purposes would be $49,000. The same method is used for state taxes. Most states use the federal Schedule C to determine total income for state tax determination.

Self-employment Taxes
A sole proprietor is a self-employed individual and must pay self-employment taxes based on the income of the business. Self-employment tax is included in Form 1040 for federal taxes, calculated using Schedule SE,, and the total self-employment tax liability is included on line 57 of Form 1040.

Other Employment Taxes
If a sole proprietor has employees, the business must pay employment taxes, including withholding and reporting federal and state income taxes, paying and reporting FICA (Social Security and Medicare) taxes, worker's compensation taxes, and unemployment taxes.

Property Taxes
If the sole proprietor owns a building or other real property, property taxes are required to be paid on this property.

State Sales, Excise, and Franchise Taxes
Sole proprietors are required to pay state sales taxes and excise taxes in the same manner as other business types. Check with your state department of revenue for more information on sales and excise taxes. Sole proprietorships are not typically liable for franchise taxes, as these are levied by states on corporations.

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