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Small business owners, especially newer ones, have numerous responsibilities. From marketing and team supervision to managing payroll and bookkeeping, there’s a lot to take on to ensure your operations flourish long-term. As you continue building your business in 2026, it's imperative to stay on top of your ongoing tax obligations.
If you run your business as a sole proprietor, your taxes are filed as part of your personal income tax return. Use this guide to learn how sole proprietorship taxes work in 2026 — including required IRS tax forms you'll need, quarterly estimated taxes, eligible deductions, and when taxes differ from those of common LLCs. This helps ensure compliance and a minimal tax liability for your sole proprietorship.
How a Sole Proprietorship Is Taxed
Sole proprietor taxes explained: Sole proprietors are taxed at the individual income tax rate. This involves the owner reporting and paying their sole proprietorship taxes on their annual personal tax return. This differs from a C corporation or an S corporation, which reports taxes on a separate business tax return.
2026 federal income tax brackets for single filers:
Rate | 2026 Taxable Income |
10% | Up to $12,400 |
12% | $12,401 to $50,400 |
22% | $50,401 to $105,700 |
24% | $105,701 to $201,775 |
32% | $201,776 to $256,225 |
35% | $256,226 to $640,600 |
37% | Over $640,600 |
The IRS classifies sole proprietorship taxation as “pass-through” because the tax liability “passes through” to the owner of the business on their personal tax return. The business's net income will increase the owner’s personal taxable income, pushing them into a higher tax bracket under pass-through taxation.
Sole proprietors will complete and file the following forms:
IRS Form 1040, U.S. Individual Income Tax Return
Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
Schedule SE (Form 1040), Self-Employment Tax
While small business owners are eligible for numerous deductions, income taxes are not considered business expenses.
What Taxes Do Sole Proprietors Pay?
In 2026, sole proprietors are responsible for the following taxes:
Federal income tax
State income tax (if applicable)
Self-employment tax 2026 (15.3%)
Quarterly estimated taxes (federal and state)
Sales tax (if applicable)
Local taxes (vary by county and city)
Accurate quarterly tax estimates are due four times annually. Refer to our quarterly estimated tax guide for insights into producing accurate calculations. Estimated tax payments are due by:
April 15, 2026
June 15, 2026
September 15, 2026
January 15, 2027
For 2026, the rule for 92.35% of net earnings continues to apply to self-employment tax, which funds Social Security and Medicare. Social Security is 12.4% on earnings up to $185,500 (2026 wage base), while 2.9% goes to Medicare for all earnings. For single filers making $200,000 or more, they will be subject to an additional 0.9% rate that funds Medicare taxes.
How to Calculate Sole Proprietor Income
Sole proprietors do not pay taxes on the business’s revenue. Instead, they will only pay tax on business profits. This means they’ll get taxed on all profits regardless of how much money they withdraw from the business. Use this formula to determine profit:
Profit = income – deductible expenses
The sole proprietorship’s taxable income will be close to the “net income” or “net profit” number at the bottom of the profit and loss statement, but with a few adjustments.
A common mistake that sole proprietors make is recording cash activity, such as owner draws, as expenses or income on their profit and loss statement. Owner draws are not considered taxable income. These incorrectly recorded transactions affect the total profit calculation and can result in either an overpayment or an underpayment of taxes.
Debt payments, loan proceeds, and personal deposits must not be miscategorized, underscoring the importance of managing small business bookkeeping correctly to report taxable income and any applicable deductions.
Tax Deductions for Sole Proprietorships
Small business owners and sole proprietors are eligible for numerous tax deductions that will reduce their taxable income.
Common 2026 sole proprietor tax deductions you should consider include:
Home office deduction
Health insurance
Mileage (70 cents in 2025, but will increase for 2026)
Phone and internet
Equipment and software
Business meals (50%)
Business insurance
Banking fees
Continuing education
IRA or SEP contributions
Professional services (CPAs, lawyers, full-service virtual bookkeeping, and tax advisory)
Sole proprietors should track their expenses year-round with bookkeeping software or a simple spreadsheet to avoid mistakes and maximize deductions.
Sole Proprietorships as LLCs
Some sole proprietors opt to form as a Limited Liability Company (LLC), which offers numerous advantages, including liability protection, growth, and potential tax planning benefits. Keep the following considerations in mind before you elect to operate as an LLC:
LLC is a legal status, not a classification for federal income tax purposes.
A single-member LLC is taxed the same as a sole proprietorship by default (pass-through via sole proprietor Schedule C).
Multi-member LLCs default to partnership taxation.
Single- or multi-member LLCs may elect S corp or C corp taxation using IRS Form 8832, Entity Classification Election.
If you’re unsure whether sole proprietorship or LLC taxation is best, a CPA can evaluate your net business income, liability needs, current tax bill, and long-term goals to help chart a course forward.
Make Sole Proprietorship Taxes Easier with an Expert Accountant
Sole proprietorship taxes can be simple — but only if your bookkeeping is accurate, your deductions are organized, and your estimated taxes are correctly calculated. A tax professional ensures you stay compliant and avoid penalties throughout the year.
When you trust 1-800Accountant, America's leading virtual accounting firm, with your tax work, your designated accountant or team helps your business save the most money while avoiding penalties, so you can focus on what you do best: growing your business.
Schedule a free 30-minute consultation to talk to a tax expert and get started.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.