What tax forms do you need to deal with as a sole proprietorship?

If you’re a new business going through your first year-end or tax season, you may not be sure what tax forms should be on your radar. Let’s review!

FYI, all these same tax forms apply to a single member LLC (SMLLC) taxed as a sole proprietor too, which many SMLLCs are unless you’ve made a special tax election to be taxed as an S Corporation instead.

First – what exactly is a sole proprietorship?

A sole proprietorship is a type of business entity where there is one of you running your business activity. If you start selling online with the intent to make a profit and do nothing else (file no specific paperwork) you pretty much default to being considered a sole proprietorship. (If there were 2 or more of you, you’d default to being a partnership!)

There generally can be paperwork associated with properly being a sole proprietorship, like getting your DBA (doing business as) or assumed name license, and possibly your sales tax permit (more on that here).

Contrary to popular belief though, there’s not necessarily something you must DO to “become” a sole proprietor. Just the act of starting an online shop or selling your products with the intent to make a profit is enough for you to be a business operating as a sole prop in the eyes of the IRS.

Ok, so what does a sole proprietor do at tax time?

I’m specifically talking about income tax time, to be clear. Not sales tax time – which varies by state.

Sole proprietors should be prepared to report their business income and expenses with their personal tax form, the Form 1040. All these forms are due April 15th. Bottom line – know that your sole proprietorship stuff is reported with your personal tax stuff; it doesn’t have a separate or different deadline.

I suggest you use the links provided to go check out each of these forms and their instructions, and print the ones that will apply to you. Getting familiar with them is the first step towards confidence!

Here’s a list of the most common forms a product seller, e-commerce shop, or creative biz owner like ourselves will need to deal with at income tax time:

Schedule C (Profit or Loss from a Business)

Schedule C

This is the main form you need to know about, because it’s where sole proprietors report all their sales and expenses (ie, business deductions). On it, you will calculate your net profit (how much money you really made after subtracting what you spent on your business). That net profit figure then travels to a few other places, like the Schedule 1, the Form 1040 and possibly the Schedule SE.

→ I have a more in-depth review of the Schedule C here that I recommend you read!

 

Schedule SE (Self Employment Tax)

If your net profit on your Schedule C is $400 or more, then that amount will travel to the Schedule SE, where you calculate any self-employment tax you owe. This tax covers your Social Security and Medicare contributions, which are normally split with an employer. But since you’re the boss and the employee, you’re responsible for the whole 15.3%. Don’t panic though – you do get to deduct half of this tax on your 1040.

Form 8829 (Business Use of Home)

home office deduction and the schedule c

If you run your shop or your creative biz from a space in your home, you may get to deduct what’s commonly called the home office deduction (and formally called the business use of home deduction). Now if you opt for the simplified method of taking this deduction, you can claim it directly on your Schedule C. But if you opt for taking a percentage of actual expenses, you’ll do that on Form 8829. Form 8829 lets you claim a portion of your home expenses, like rent, utilities, and even internet, as a business deduction. The end result will travel back to your Schedule C.

Qualifying for the home office deduction can sometimes be tricky, and I recommend you learn more about it inside the Get Legit Toolkit®.

Form 4562 (Depreciation and Amortization)

depreciation and the schedule c

If you bought a big-ticket item like an asset or a piece of equipment for your business this year, then you may need to depreciate that purchase instead of just writing off the entire cost in the year of purchase. Instead of deducting the full expense in one year, you spread it out over several years. It’s basically a way of saying, “Hey, this equipment will help my business long-term, so let’s spread the tax benefits out, too.” Depreciation is calculated on Form 4562, and the end result will travel over to your Schedule C.

Schedule 1

Schedule 1

The end result of your Schedule C (your net profit or loss) will travel over to the Schedule 1. It’s like the middle man between your business Schedule C and your personal Form 1040. On the Schedule 1, you are asked to report any additional income (like unemployment benefits, businesses, etc.) and certain adjustments to income, such as student loan interest or HSA contributions.

Form 1040

sole proprietorship tax forms

Hopefully you’ve already heard of this one, since the Form 1040 is the MVP of tax forms. This is your main tax return that reports your total income, deductions, and tax liability to the IRS. For e-commerce sellers & creative business owners, your net profit from Schedule C (via the Schedule 1), self-employment tax from Schedule SE, and other income details all end up here. It’s the big picture summary of your tax situation, and the IRS uses it to calculate whether you owe taxes or are getting a refund.

1099NEC (bonus!)

1099nec sole proprietor tax forms

The 1099NEC is not a form that goes alongside any of the above forms with your personal tax return, but it is another form you may have to deal with this time of year as a sole proprietor. If you paid any contractors $600 or more during the year for services related to your business, you may need to send them a 1099NEC. This form reports the payments you made to these independent contractors. Note that it’s not the proper form to send to any employees (that’s called a W2).