- Report your income and expenses from your sole proprietorship on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) or on Schedule C-EZ (Form 1040), Net Profit from Business (Sole Proprietorship).
- If the total of your net earnings from self-employment from all businesses is $400 or more, use Schedule SE (Form 1040), Self-Employment Tax to figure your net earnings from self-employment and tax owed.
The self-employment tax consists of the Old-Age, Survivors, and Disability Insurance (social security) and the Hospital Insurance (Medicare) taxes. The IRS will transmit the information from the Schedule SE to the Social Security Administration to figure your benefits under the social security system. See Publication 334, Tax Guide for Small Business.
Note: The federal tax system is a pay-as-you-go plan. Employers generally withhold taxes from employees' wages or salary before they pay them. However, payers generally don't withhold tax from payments they make to self-employed individuals. Therefore, you may need to make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.
If your sole proprietorship business has no profit or loss during the full year, it's not necessary to file a Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) for that year.
If your business is inactive, but you receive payments such as insurance that relate to the business, you must report those payments on a Schedule C or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship).