Sole Proprietors: File Your Taxes With Confidence

One of the costs of doing business is paying business taxes. As a sole proprietor, you’re likely required to file a tax return by April 15, 2025, which is the same deadline for individuals this year. If this is your first time filing business taxes, you’ll need to get acquainted with some important tax forms. 

The following tips can help you avoid common tax mistakes made by sole proprietors.*

1. Pay estimated taxes quarterly

Business tax responsibilities aren’t just for tax season. You need to pay estimated taxes each quarter.* Sole proprietors should use Form 1040-ES to calculate and pay estimated taxes. If you don’t pay enough through your estimated tax payments, you may be charged a penalty. You may also incur a penalty if you don’t pay enough by the due date of each payment period, even if you’re due a refund.

2. Report all business income

If you receive income that’s connected to your sole proprietorship, it’s considered business income. Business income usually takes the form of cash, checks and electronic payments. However, it can take other forms, such as property or services. In those cases, you must report the fair market value of the property or services you received. 

For example, if your catering service is hired by a local farmer who pays you with 10 dozen eggs a week for a year, you must report the value of the eggs. The Internal Revenue Service (IRS) compares the information reported by banks, businesses and other payers with the wages you report on your income tax return. If the IRS believes you’ve underreported your taxable income—say you made a larger profit that year—it’ll send you a notice with proposed changes to your tax. You may owe interest and/or a penalty.

3. Choose a method for taking the home office deduction, if you qualify

If you use part of your home exclusively for your sole proprietorship business on a regular basis, then you may be able to deduct expenses for the business use of your home. There are 2 methods for taking this deduction:

• Regular method: Calculate the actual expenses for your home office based on the percentage of your home devoted to business use.
• Simplified method: Deduct $5 per square foot of your home used for business, up to 300 square feet. 

4. Take the proper deduction for business gifts

You can deduct all or part of the cost of gifts given while working in your trade or business, up to $25 per person. For example, if you give $25 gifts to 10 people ($250 total), you can deduct $250. If you give $50 gifts to 10 people ($500 total), you can still only deduct $250 (the first $25 of each individual gift).

5. Deduct all business expenses

According to the IRS, for a business-related expense to be deductible, it must be both ordinary and necessary. You should track all your expenses, large and small, throughout the year rather than trying to gather a year’s worth of receipts when the tax deadline rolls around. Check out the IRS Guide to Business Expense Resources for more about deducting business expenses.

6. Understand your tax situation before you file

Because tax laws for business owners change frequently, it’s vital to review your tax situation for potential changes and new opportunities to reduce your tax burden. For help with tax-saving strategies for small businesses, consult with a qualified tax professional. 

IRS tax forms for sole proprietorships