As a sole proprietor, you work for yourself and handle the business -- usually by yourself. Sole proprietors make up for approximately 73 percent of all businesses in the United States as of 2000. If you are the lucky owner of a sole proprietorship or are thinking about starting one, it is helpful to understand how to deal with the tax side of the business.
Definition of a Traditional Sole Proprietorship
A traditional sole proprietorship is a business that's unincorporated, owned by one owner and is not a limited liability company. If a married couple owns a business, the Internal Revenue Service generally considers the business a partnership. In many cases, the owner of a sole proprietorship operates the business, but some sole proprietorships also have employees. If you own a sole proprietorship, the IRS considers you self-employed, and you file your business taxes with your personal taxes.
How Long Does the Average Sole Proprietorship Last?
Owning a business is tough work, and over half of small businesses won't survive the first five years. According to the U. S. Small Business Administration, only 49 percent of small businesses survive the first five years, 34 percent survive 10 years, and 26 percent survive more than 15 years. As of 2008, there were 27.2 million small businesses in the U.S. and 22.5 million of those small businesses were sole proprietorships.
How Many Times Is a Sole Proprietorship Taxed?
The IRS taxes a sole proprietor at the same time they tax his personal taxes -- once a year. Income from a sole proprietorship is taxed as regular income, such as wages or salary, but in the "Business Income or Loss" line on Form 1040. Sole proprietors also have to pay self-employment tax, which is the employee and employer portion of the Social Security and Medicare taxes. If a business owner has employees, he must make scheduled payroll tax payments to the IRS. If he plans to owe more than $1,000 in taxes at the end of the year, a sole proprietor must also make quarterly estimated tax payments toward the tax debt.
How Many Years in a Row Can a Sole Proprietorship Report a Loss?
According to the IRS, a business must report a profit three out of the last five years to be considered an actual business. If the business revolves around showing, training, breeding or racing horses, then it must show a profit two out of the last seven years. If your business doesn't meet the profit criteria, the IRS will assume that your business is a hobby and stop you from reporting the business's income or loss on your return. You'll have to start claiming your business expenses as your personal itemized deductions.
Can You Write Off the Expense of the Owner's Payroll Tax in a Sole Proprietorship?
A sole proprietor can write off employee income taxes on his tax return. On Schedule C, which is the form sole proprietors use to calculate net profit and loss, there is a specific line for tax expense. In this line, you can include payments made to federal unemployment tax, or FUTA, and Social Security and Medicare, or FICA. You can't, however, write off your own self-employment tax.
- Internal Revenue Service: Publication 334 - Tax Guide for Small Business
- Internal Revenue Service: Can a Husband and Wife Operate a Business as A Sole Proprietor...
- Small Business Administration: Frequently Asked Questions
- U.S. Census Bureau: Statistics About Business Size
- U.S. Census Bureau: Sole Proprietor Statistics
- Internal Revenue Service: Small Business and Self-Employed Individuals Tax Center
- Internal Revenue Service: Publication 15
- Internal Revenue Service: Business or Hobby?
- Internal Revenue Service: Schedule C Instructions
- Internal Revenue Service: U.S. Sole Proprietorship
Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.