From the perspective of the Internal Revenue Service (IRS), a sole proprietorship isn’t a taxable entity. Assets and liabilities of the business are treated as belonging to the owner. As a sole proprietor, you report the profits or losses of your business on your personal income tax return, Form 1040. Your earnings are subject to income tax and self-employment tax, and you’re required to pay tax on income the year you earn it. At tax time, income and expenses generated by your business are reported on either Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business) and submitted to the IRS along with Form 1040. You must pay tax on all profits whether or not you actually withdraw money from the business. There are no tax effects for transferring money into or out of a sole proprietorship.
Business Expenses: You can deduct some of the money you spend to generate income, including operating expenses, travel expenses, advertising, and a percentage of business-related meals and entertainment. You are also allowed to write off the cost of business equipment and other business assets as well as certain start-up expenses.
Self-Employment Taxes: Sole proprietors contribute to the Social Security and medicare systems through so-called self-employment taxes. Self-employment taxes are reported on Schedule SE (Self-Employment Tax) and submitted together with Form 1040 and Schedule C-EZ (Net Profit from Business).
Estimated Tax Payments: The IRS requires you to estimate how much tax you will owe each year and make quarterly estimated tax payments. Some states require this as well.