A sole proprietorship is taxed through the personal tax return of the owner, on Form 1040. The business profit is calculated and presented on Schedule C. To complete the Schedule C, the income and allowable expenses of the business are listed. The net income of loss of the business is entered on Line 12 of the owner's Form 1040, to be included along with other income/loss of the owner for income tax purposes. The owner also pays self-employment tax (Social Security/Medicare) on the sole proprietorship income. (See Schedule SE for the self-employment tax calculation.) If the business has a loss for the year, no self-employment taxes are due.
The owner of the sole proprietorship pays income tax on all income, including income from business activities, at the applicable individual tax rate for that year.