Business Entities and Considerations · Business entities

Sole proprietorships

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

The sole proprietorship is the default state of an unincorporated business with one owner, and it is defined by what it is not. There is no entity, no separate return, no separate taxable year and no filing date of its own. Every question about a sole proprietorship resolves into a question about its owner. That sounds simple, and it is the reason the topic generates errors: preparers reach for entity answers — a March filing date, an entity-level election, an entity-level liability — that do not exist here.

The rule

It is disregarded. a business entity with a single owner that is not a corporation under Reg. § 301.7701-2(b) is disregarded as an entity separate from its owner for federal tax purposes (Reg. § 301.7701-2(c)(2)(i))^TY2026 A single-member unincorporated business is its owner for federal tax purposes unless an election changes that, which is the subject of 2.1.1.g.

It has no filing date of its own. the same date as the owner's individual return — a sole proprietorship files no return of its own, so the business is reported on a schedule to the Form 1040 and follows the individual calendar in IRC § 6072(a), not the 15 March date that applies to partnerships and S corporations under § 6072(b)^TY2026

The income is the owner’s, and so is the self-employment tax. gross income derived from any trade or business carried on by the individual, less the deductions attributable to that trade or business, plus the distributive share of income or loss from any trade or business carried on by a partnership of which the individual is a member (IRC § 1402(a))^TY2026 The tax is imposed on that amount by IRC § 1401, and net earnings from self-employment of less than $400 are excluded from self-employment income altogether — an unindexed figure, so the exclusion has narrowed steadily in real terms (IRC § 1402(b)(2))^TY2026

A return is required at a low figure. $400 or more of net earnings from self-employment for the taxable year obliges every individual other than a nonresident alien to make a self-employment tax return, and on a joint return the tax is computed on each spouse's separate self-employment income rather than on the aggregate (IRC § 6017)^TY2026

And “business” means what it means everywhere else. trade or business for self-employment purposes has the same meaning as in IRC § 162, subject to the exclusions that section 1402(c) then lists (IRC § 1402(c))^TY2026 With deductions on the ordinary standard: all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including reasonable compensation for services actually rendered and travelling expenses that are not lavish or extravagant (IRC § 162(a))^TY2026

Current figures

Item	Rule
Disregarded status	a business entity with a single owner that is not a corporation under Reg. § 301.7701-2(b) is disregarded as an entity separate from its owner for federal tax purposes (Reg. § 301.7701-2(c)(2)(i))^TY2026
Filing date	the same date as the owner's individual return — a sole proprietorship files no return of its own, so the business is reported on a schedule to the Form 1040 and follows the individual calendar in IRC § 6072(a), not the 15 March date that applies to partnerships and S corporations under § 6072(b)^TY2026
Net earnings from self-employment	gross income derived from any trade or business carried on by the individual, less the deductions attributable to that trade or business, plus the distributive share of income or loss from any trade or business carried on by a partnership of which the individual is a member (IRC § 1402(a))^TY2026
Self-employment tax floor	net earnings from self-employment of less than $400 are excluded from self-employment income altogether — an unindexed figure, so the exclusion has narrowed steadily in real terms (IRC § 1402(b)(2))^TY2026
Self-employment tax return	$400 or more of net earnings from self-employment for the taxable year obliges every individual other than a nonresident alien to make a self-employment tax return, and on a joint return the tax is computed on each spouse's separate self-employment income rather than on the aggregate (IRC § 6017)^TY2026
Trade or business	trade or business for self-employment purposes has the same meaning as in IRC § 162, subject to the exclusions that section 1402(c) then lists (IRC § 1402(c))^TY2026
Deduction standard	all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including reasonable compensation for services actually rendered and travelling expenses that are not lavish or extravagant (IRC § 162(a))^TY2026
Self-employment tax rate	12.4 percent for old-age, survivors and disability insurance and 2.9 percent for hospital insurance, plus an additional 0.9 percent on self-employment income above the threshold^TY2026
Wage base	$184,500 for 2026 — the old-age portion applies only to net earnings up to the contribution and benefit base under section 230 of the Social Security Act, reduced by wages paid to the individual in the year, while the hospital insurance portion has no ceiling^TY2026
Deduction for half the tax	one-half of the taxes imposed by IRC § 1401, other than the additional hospital insurance tax under § 1401(b)(2), deducted in computing adjusted gross income and treated as attributable to a trade or business not consisting of services as an employee^TY2026

How it works in practice

Start by saying what does not exist. No entity return, no entity-level tax, no entity-level election except the one that stops it being a sole proprietorship, and no separate year end. The business adopts the owner’s taxable year because it has none of its own.

The filing date question is the one clients ask and get wrong. Partnerships and S corporations file by the fifteenth day of the third month. A sole proprietorship has no return to file by any date: the business schedules ride on the owner’s individual return and follow the individual deadline.

Self-employment tax is the real cost of the form. An owner drawing profit from a sole proprietorship pays both halves of the social security and Medicare charge on the net earnings, which is the single largest arithmetic difference between operating this way and operating through an S corporation. That comparison belongs at 2.1.1.d, but it starts here.

The statutory figure does two things and they are not the same. Below it the amount is excluded from self-employment income (IRC § 1402(b)(2)); at or above it a self-employment tax return is required (IRC § 6017). net earnings from self-employment of less than $400 are excluded from self-employment income altogether — an unindexed figure, so the exclusion has narrowed steadily in real terms (IRC § 1402(b)(2))^TY2026 — so it now catches almost any deliberate business activity.

Spouses are computed separately. On a joint return the self-employment tax is not computed on aggregate earnings — § 6017 requires the sum of the tax on each spouse’s separate self-employment income, which matters where one spouse is over the wage base and the other is not.

And a sole proprietorship can still have employees. Disregarded status is about income tax. Employment tax obligations, an employer identification number and the payroll filings are the owner’s responsibility in their own name, and are covered at 2.1.1.h and 2.1.1.k.

The March deadline that did not apply

A client runs a design business as a sole proprietor. Her accountant’s checklist, written for the firm’s partnership clients, tells her the business return is due on 15 March. She panics in February about records she has not gathered.

There is no business return. IRC § 6072(b) sets the fifteenth day of the third month for partnership and S corporation returns; a sole proprietorship files nothing of its own, and the business results appear on schedules to her individual return under the ordinary individual deadline. The only thing March brings her is the first estimated tax instalment date the following month.

The $380 that was not self-employment income

A retired client repairs clocks occasionally and made $380 of net profit from it in the year, with no other business activity.

His net earnings from self-employment are less than $400, so under IRC § 1402(b)(2) the amount is excluded from self-employment income altogether and no self-employment tax arises. No § 6017 return is required either, since that obligation begins at $400. The profit is still gross income for income tax purposes — the exclusion is from the self-employment charge, not from the return.

Two spouses, one joint return, two computations

A couple file jointly. She has $210,000 of net earnings from a consultancy; he has $16,000 from a small craft business.

The self-employment tax is not computed on their combined $226,000. Section 6017 requires the sum of the tax computed on each spouse’s separate self-employment income, so her earnings run against the wage base on their own and his do the same. Aggregating them would move part of his earnings above a base that his own earnings never reach, and would overstate the tax.

The business that was still the owner

A client forms a single-member limited liability company for his consultancy, obtains an employer identification number for it, and opens a bank account in its name. He asks which return the company files.

None. Under Reg. § 301.7701-2(c)(2)(i) a business entity with a single owner that is not a corporation is disregarded as separate from its owner, so for income tax purposes the company is a sole proprietorship and its results go on his individual return. State law liability protection and federal tax classification are different questions, and the answer to one says nothing about the other. Whether he can change that answer is 2.1.1.g.

Applying the 15 March date. That is IRC § 6072(b), for partnerships and S corporations. A sole proprietorship has no return of its own.

Assuming a single-member LLC files something. It is disregarded for income tax unless an election is made; the limited liability is a state law matter.

Treating the statutory floor as a threshold below which nothing is reported. It removes the self-employment charge and the § 6017 return, not the income tax reporting of the profit.

Aggregating spouses’ self-employment income on a joint return. Section 6017 computes each spouse separately and adds the results.

Assuming disregarded means invisible. A disregarded entity can be an employer, with its own obligations for employment tax purposes.

Expecting a different deduction standard. Section 162(a) applies as it does to any trade or business — ordinary and necessary, paid or incurred in carrying it on.

Forgetting the partnership share. Net earnings from self-employment include the distributive share of trade or business income from a partnership of which the individual is a member, whether distributed or not.

How this has changed

The classification rules that make a single-owner unincorporated business a sole proprietorship date from the check-the-box regulations of 1996, which replaced a multi-factor test with an election. Nothing in Pub. L. 119-21 amended Reg. § 301.7701-2, § 6017 or § 1402(b).

What has changed around the form is the arithmetic that makes people leave it. The qualified business income deduction, made permanent by the 2025 Act and covered at 1.3.1.h, applies to a sole proprietorship’s income, which removed one historic reason to incorporate. Against that, the self-employment charge on the whole of the profit remains, and it is the reason the S corporation comparison at 2.1.1.d is the most common entity conversation in practice.

The floor is the oldest thing on this page. It has stood unindexed since the self-employment tax was introduced in 1950, and it is now low enough that it exempts essentially nothing — a striking contrast with the transfer tax thresholds, which have multiplied many times over the same period.

Exam focus

The reliable question is the filing date, framed as an “all of the following except” list in which the sole proprietorship is the odd one out. Know that § 6072(b) governs partnerships and S corporations and that a sole proprietorship has no separate return.

Know the statutory floor and what it does: it excludes the amount from self-employment income under § 1402(b)(2) and it sets the § 6017 return requirement. net earnings from self-employment of less than $400 are excluded from self-employment income altogether — an unindexed figure, so the exclusion has narrowed steadily in real terms (IRC § 1402(b)(2))^TY2026

Expect the single-member LLC as a disguised sole proprietorship, and know that disregarded status is the default rather than an election.

Check yourself

1. When is a calendar-year sole proprietorship’s business return due?

Answer: There is none. A sole proprietorship files no return of its own; the business results are reported on schedules to the owner’s individual return and follow the individual due date. The 15 March date in IRC § 6072(b) applies to partnerships and S corporations.

2. A taxpayer’s only business produced net earnings from self-employment of $360. Is self-employment tax due?

Answer: No. IRC § 1402(b)(2) excludes net earnings from self-employment of less than the statutory floor from self-employment income, and the § 6017 return requirement begins at the same figure. Both stand at $400.

3. A single-member LLC has an employer identification number and its own bank account. Which income tax return does it file?

Answer: None of its own. Under Reg. § 301.7701-2(c)(2)(i) a business entity with a single owner that is not a corporation is disregarded as an entity separate from its owner, so its results are reported on the owner’s return.

4. On a joint return, how is self-employment tax computed where both spouses have self-employment income?

Answer: Separately and then added. IRC § 6017 provides that the tax is not computed on aggregate income but is the sum of the taxes computed on the separate self-employment income of each spouse.

5. Does a partner’s distributive share enter net earnings from self-employment?

Answer: Yes. IRC § 1402(a) includes the distributive share, whether or not distributed, of income or loss described in § 702(a)(8) from any trade or business carried on by a partnership of which the individual is a member.

Change log

2026-08-21Initial draft. Sets out the sole proprietorship as the absence of an entity — disregarded under Reg. § 301.7701-2(c)(2)(i), reported on the owner's return with no separate filing date under IRC § 6072, subject to self-employment tax under §§ 1401 and 1402 with the § 6017 return requirement and the unindexed $400 floor, and deducting under the ordinary § 162 standard.