true
  • Meet Claudell, one of our tax experts.
    TurboTax Live Assisted Basic
    File 100% FREE with expert help: Get live help from tax experts, plus a final review before you file — all free.
    Simple tax returns only.
    See if you qualify. Must file by 3/31.
Top

Tax Tips for Sole Proprietors

Updated for Tax Year 2022 • December 1, 2022 08:11 AM


OVERVIEW

As a sole proprietor, you are in charge of your own business. You'll face additional taxes and reporting requirements, but you may also be eligible for certain business tax deductions.


Self-employment taxes done right

Let a tax expert do your taxes for you with Live Full Service Self-Employed.

Backed by our Full Service Guarantee

Pastry vendor serves customer

Self-employed tx tips

As a sole proprietor, you are in charge of your own business. As far as the tax code is concerned, you and your business are a single entity. While this entails certain freedoms, it also creates added responsibilities. You'll face additional taxes and reporting requirements, but you may also be eligible for certain business tax deductions.

Health insurance deduction

One of the main tax advantages of running a sole proprietorship is that you can deduct the cost of health insurance for yourself, your spouse and any dependents. Better still, you can take this deduction even if you don't itemize deductions on your tax return. The health insurance deduction is an "above-the-line" deduction, meaning it is taken off your gross income before you reach your adjusted gross income. Other deductions, such as itemized deductions, are "below-the-line" deductions.

Your deduction is limited by the amount of your taxable income, so if you take a loss on your business, you can't also take the health insurance deduction. You also can't take a deduction for any months that you or your spouse are eligible for group health insurance with an employer.

Business expenses

Every business has operating expenses, and a sole proprietorship is no different. As long as your expenses are "ordinary and necessary," in the parlance of the Internal Revenue Service, you can claim them on your tax return. In addition to health insurance, common deductions include equipment, utilities, subscriptions, travel, and capital assets.

If you operate your business out of your home, you can likely claim the home office deduction. Certain everyday expenses, such as rent and utilities, can be deductible. However, you must use this section of your home exclusively for your business.

Self-employment tax

If you run your own business, you're responsible for self-employment taxes, in addition to regular income tax. Self-employment taxes are the equivalent of the Social Security and Medicare taxes that all employers and workers have to pay. When you work for an employer, you only pay the employee's portion of these taxes and the employer pays the other half. As a sole proprietor, you have to pay both the employer's and the employee's portions. You are allowed to take a tax deduction for half of your self-employment taxes.

Records and audits

The IRS tends to take a closer look at tax returns filed by sole proprietors because it can be easy to blur the line between business and personal expenses. Even though your business and your personal tax return are combined, the IRS still expects you to keep accurate and distinct business records. If you deduct the full price of a computer, for example, the IRS may want to see records proving that the computer is used for business purposes only.

If your expenses exceed your income, you can expect additional IRS scrutiny, particularly if you haven't turned a profit in at least three of the most recent five years. You shouldn't be afraid to take a deduction you are legitimately entitled to, but be sure to keep detailed records to support your claims, particularly the home office deduction.

With TurboTax Live Full Service Self-Employed, work with a tax expert who understands independent contractors and freelancers. Your tax expert will do your taxes for you and search 500 deductions and credits so you don’t miss a thing. Backed by our Full Service Guarantee. You can also file your self-employed taxes on your own with TurboTax Self-Employed. We’ll find every industry-specific deduction you qualify for and get you every dollar you deserve.

Self-employment taxes done right

Let a tax expert do your taxes for you with Live Full Service Self-Employed.

Backed by our Full Service Guarantee

Taxes done right for freelancers and gig workers

TurboTax Self-Employed searches 500 tax deductions to get you every dollar you deserve.

Looking for more information?