What First-Time Solopreneurs and Sole Proprietors Should Know About Their Taxes

There are a lot of entrepreneurs out there that are building businesses all on their own. Of the 36.2 million small businesses in the U.S.¹, the vast majority (more than 80%) are one-person businesses without a single employee².

If you’re one of these solopreneurs or sole proprietors who started up recently, you’re likely focused on important things like developing a product or service, exploring providers, and finding customers. But there’s one more important detail that shouldn’t be put off or ignored: tax planning.

“If you expect to owe $1,000 or more you need to pay quarterly estimated taxes, so it’s important to track your income and expenses year-round,” explains Lisa Greene-Lewis, CPA and Tax Expert at TurboTax.

A solopreneur runs his or her business alone and can operate it as self-employed or incorporate as a single-member limited-liability corporation (LLC), which provides some legal protections from debt and lawsuits. Meanwhile, a sole proprietor runs their business alone without a legal separation between personal and business assets, meaning they are more exposed to personal liability.

No matter which direction you’ve chosen, both sole proprietors and solopreneurs (even single-member LLCs) are taxed as self-employed on a Schedule C along with their personal taxes. Here, Greene-Lewis outlines several things first-time solopreneurs and sole proprietors should remember to make the most of their tax returns.

Keep tabs on your financials to maximize deductions

The very first and most important step is to keep detailed financial records of income and expenses as these are critical for accurate financial and tax records. “You especially want to make sure you don’t leave out expenses directly related to your business since business deductions lower the taxes you owe,” Lewis-Greene explains.

Solopreneurs and sole proprietors can deduct startup costs of up to $5,000 come tax time, Lewis-Greene says. They can also deduct up to $2.5 million for business equipment purchases. Expenses related to travel, auto, advertising, marketing, website development and support can also be deducted.

“Many self-employed are hesitant to claim the home office deduction, but if you have a dedicated space in your home that you use for your office you can deduct a portion of your rent, mortgage interest, property taxes, utilities, and depreciation based on the space you use for your home office,” Lewis-Greene says.

And under the new tax law, the Qualified Business Income (QBI) deduction was permanently extended, allowing solopreneurs and sole proprietors to deduct up to 20% of your qualified business income. Lewis-Greene notes that limitations may apply if your business is a Specified Service Trade—such as a health, law, or accounting service—or your income exceeds certain income thresholds.

Grow your retirement while lowering your taxable income

Lewis-Greene recommends that solopreneurs and sole proprietors invest into a Simplified Employee Pension (SEP IRA). Essentially, these are a low-cost, flexible retirement plan allowing employers and the self-employed to make tax-deductible contributions directly to traditional IRAs for themselves.

Investment, distribution, and rollover rules are the same as for traditional IRAs. “You can still make a 2025 contribution to a SEP IRA up to the lesser of 25% of net income or $70,000 until the October extended deadline and deduct your contribution,” she explains.

Solopreneurs can eliminate self-employment tax

Solopreneurs that have already formed a single-member LLC have the option to eliminate paying the standard 15.3% self-employment tax on net profits. Lewis-Greene says this is done by using IRS Form 2553 to elect S Corporation tax status.

An S Corporation is a tax classification that considers a solopreneur or sole proprietor as an employee who must be paid a pre-determined salary for their work. While that salary is subject to federal income taxes and state income taxes, Medicare, and Social Security tax, any other profits (paid as distributions) aren’t subject to Medicare and personal income tax or Social Security taxes.

Getting it right, right from the start

Let’s face it: Keeping detailed financial records throughout the year is a task on its own. Having to prepare your taxes and having to stay on top of always-evolving tax codes can require more time than most busy solopreneurs and sole proprietors can spare.

That’s why so many rely on TurboTax Expert Business Full Service to maintain visibility throughout the year, maximize savings, and streamline their books ahead of tax filing. TurboTax integrates proprietary AI with human expertise and uses advanced import capabilities to automates data entry for 92%+ of tax forms. The business expense maximization assistant imports messy spreadsheets, categorizes expenses using IRS rules, and suggests additional deductions based on business type.

“If you want an expert to do your taxes for you, you are matched with a business tax expert who is experienced in your industry, who knows the business deductions and credits specific to your business, so you don’t leave any money on the table,” Lewis-Greene says.

Click here to learn more about how TurboTax can help solopreneurs and sole proprietors save more money on their business taxes.

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