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Tax Trails - Self-Employment Income

Sole Proprietorship

You're self-employed if you carry on a trade or business as a sole proprietor. Generally, you carry on a trade or business if your primary purpose is to earn a livelihood or to make a profit, and you're involved in the activity with continuity and regularity. You don't need to actually make a profit to be in a trade or business as long as you have a profit motive. You don't have to carry on the activities full-time to be in a trade or business. Part-time work may be enough.

You're a sole proprietor if you own an unincorporated business by yourself. If you're the sole member of a domestic Limited Liability Company (LLC), you're a sole proprietor unless you elect to treat the LLC as a corporation. A sole proprietor must report income and expenses from their business on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship), may sometimes be used instead of Schedule C (Form 1040). If you own more than one business as a sole proprietor, you must prepare a separate Schedule C for each business.

If you're a sole proprietor, you're generally liable for self-employment tax. Use Schedule SE (Form 1040), Self-Employment Tax, to figure this tax.

If you earn or receive income during the year that's not subject to withholding or you don't have enough tax withheld, you may have to pay estimated tax. If you don't pay enough tax during the year through withholding or by making estimated tax payments, you may have to pay a penalty. See Tax Topic 306Penalty for Underpayment of Estimated Tax.

For more information about sole proprietorships, refer to Publication 334, Tax Guide for Small Business. For more information on estimated tax, refer to Chapter 2 of Publication 505, Tax Withholding and Estimated Tax, and Tax Trails - Do You Have to Pay Estimated Tax?


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Page Last Reviewed or Updated: 19-Jan-2017