Working for yourself means you are also your own payroll and tax department. It is less scary than it sounds once you know the four moving parts: Schedule C, self-employment tax, quarterly payments, and deductions. (General information, not tax advice — amounts and rules change; confirm with a tax professional or the current IRS instructions.)
A sole proprietor (and, by default, a single-member LLC) reports business income and expenses on Schedule C of the personal Form 1040. There is no separate business return — your net profit flows onto your 1040 and is taxed alongside your other income.
Your tax return is only as clean as your records. Keep a dedicated business bank account, log income when clients pay, and categorize expenses to the Schedule C lines as you go — not in April. Money you move to yourself is an owner draw, not a deductible expense.
On top of income tax, you owe self-employment tax — about 15.3% (Social Security and Medicare) on your net profit — figured on Schedule SE. You can deduct half of it as an adjustment to income. This is the part W-2 employees never see, because their employer pays half.
No employer is withholding for you, so the IRS expects estimated payments four times a year via Form 1040-ES (roughly April, June, September, and January). Skipping them can mean an underpayment penalty. A common rule of thumb is to set aside 25–30% of profit for taxes.
Ordinary and necessary business expenses lower your taxable profit: software, a home office, business travel, part of your phone and internet, contractor payments, and more — see the Schedule C expense categories. The category is only as good as the receipt behind it.
Schedule C is painful only when your records do not line up. Categorize to the lines as you go and keep draws out of expenses, and filing becomes a review of numbers you already have — not a year-end reconstruction.
You report business income and expenses on Schedule C of your personal Form 1040; the net profit is taxed as part of your personal income. You also pay self-employment tax on that profit via Schedule SE, and because no employer withholds for you, you generally make estimated tax payments four times a year with Form 1040-ES.
Two main ones: federal income tax on your net profit, and self-employment tax of about 15.3% (Social Security and Medicare) on that same profit, figured on Schedule SE. You can deduct half of the self-employment tax. State and local taxes may also apply depending on where you live.
Usually yes. Because no employer withholds tax from your income, the IRS expects estimated payments four times a year via Form 1040-ES if you will owe $1,000 or more. Missing them can trigger an underpayment penalty, so many sole proprietors set aside 25–30% of profit as they earn it.
Ordinary and necessary business expenses: software and subscriptions, a home office used regularly and exclusively for work, business travel, part of your phone and internet, supplies, contractor payments, professional fees, and business insurance, among others. They go on Schedule C. Personal costs and owner draws are not deductible.