What is a Sole Proprietorship? Part 2 of 3: Taxation

This is the second part of three covering the Sole Proprietorship entity.  What follows is a (very) brief discussion of its general tax treatment.

Federal and state income tax authorities consider a sole proprietorship to be a “disregarded entity,” and treat all income and expenses of the business to be the owner’s personal income and expenses.  A sole proprietor must also pay the federal “self employment tax,” which is currently assessed around fifteen percent (15%) of all net earnings.  This can end up being quite a lot, and a common strategy to minimize this burden is to form an S corporation and pay yourself a reasonable, yet small salary.  That gets into some higher level stuff, but keep that idea in your arsenal when you go to meet with your attorney.

A sole proprietor who hires employees will have to pay all relevant taxes and withholdings associated with employment.  A sole proprietor will also have to pay other miscellaneous state taxes, such as sales tax and the like.  A sole proprietorship is no different than any other business entity in this regard.