Sole proprietorship taxes: Best tips and tricks for 2026

Sole proprietorship tax deductions

Running a business gives you access to various tax breaks, which are deductions that help lower the taxes you owe. Independent business owners should take advantage of all possible deductions.

As a sole proprietor, you can deduct various expenses for launching and running your business. You can deduct expenses that are necessary from your income. Here are some of the most common tax deductions available to sole proprietors:

Business expenses 

Sole proprietors can deduct various expenses, such as office supplies, advertising expenses, and legal fees. For example, a graphic designer can deduct the costs of software subscriptions and marketing expenses.

Mileage 

Vehicles are a must-use self-employed tax deduction that allows you to expense the miles you drive for work. You can use a mileage tracker to help with this. 

QBI deduction

As a sole proprietor, you may also qualify for the 20% qualified business income (QBI) deduction. This tax deduction allows taxpayers to deduct up to 20% of their qualified business income from their taxable income. The amount of the QBI deduction is your qualified business income times 20%. 

Home office expenses

If you have a space in your home that you use just for your business, you may be able to deduct expenses for your home office. The home office deduction can include a portion of rent or mortgage interest, utilities, and even depreciation.

Self-employment taxes

You’ll need to pay quarterly self-employment taxes. These are the employer and employee portions of Social Security and Medicare taxes. However, you can deduct the employer portion from your tax liability. 

Health insurance premiums 

Sole proprietors who pay for their health insurance premiums may be eligible for a deduction. Deducting health insurance for self-employed individuals includes premiums for medical and dental. Keep in mind that there are certain criteria to qualify for this deduction.

Retirement contributions

As a sole proprietor, you have several options for saving for retirement and reducing your tax burden. Here are a few to consider:

• SEP IRA: A simple plan with high contribution limits. You may contribute up to 25% of net earnings (or the plan’s defined compensation basis) capped at approximately $72,000 for 2026. It’s tax-deductible and easy to set up but offers less flexibility and may not suit you if you plan to hire employees.
• SIMPLE IRA: This allows both employee and employer contributions. For 2026 the employee deferral limit is projected at $17,000 (up from $16,500 in 2025). It’s easy to administer, but the limits are lower than a SEP and you may be required to make matching contributions if you have employees.
• Solo 401(k): Specifically designed for business owners with no employees (other than a spouse). For 2026, the combined (employee + employer) contribution limit is projected at $72,000 (not including catch-up contributions for those age 50+). It offers flexibility (including Roth and traditional options) but can be more complex to administer.
• Other qualified plans: You can explore other options like defined benefit plans, but be aware that they often have higher administrative costs.

SEP IRA: A simple plan with high contribution limits — you may contribute up to 25% of net earnings (or the plan’s defined compensation basis) capped at approximately $72,000 for 2026. It’s tax-deductible and easy to set up but offers less flexibility and may not suit you if you plan to hire employees.

SIMPLE IRA: This allows both employee and employer contributions. For 2026 the employee deferral limit is projected at $17,000 (up from $16,500 in 2025). It’s easy to administer, but the limits are lower than a SEP and you may be required to make matching contributions if you have employees.

Solo 401(k): Specifically designed for business owners with no employees (other than a spouse). For 2026, the combined (employee + employer) contribution limit is projected at $72,000 (not including catch-up contributions for those age 50+). It offers flexibility (including Roth and traditional options) but can be more complex to administer.

How to file taxes as a sole proprietorship

Filing taxes as a sole proprietor or solopreneur involves several steps. Before beginning, gather items from your tax prep checklist. Here is a step-by-step process to help you navigate this process:

• Gather necessary documents: Collect all financial records for your business, including expense receipts and bank statements.
• Calculate your income and expenses: Determine your total business income and deductible business expenses. Keep records of your business-related transactions throughout the year.
• Complete sole proprietor tax forms: Use the information to complete the appropriate tax forms. Report your business income and deductions on your personal return and calculate your self-employment tax on Schedule SE.
• Maintain accurate financial statements: Keep detailed records and separate business and personal expenses. Accurate financial statements facilitate tax filing and help you understand your business's financial health.
• File and pay taxes: Once all forms are ready, file your tax return by the deadline. You’ll likely be making estimated tax payments quarterly, but make sure to pay any remaining tax liability.

![An illustration of the important tax dates for solopreneurs and sole proprietors, including estimated tax due dates.]

Note that if you paid independent contractors or freelancers over $600 during the year, you must send them a Form 1099-NEC before Jan 31.

4 Common questions small business owners ask at tax time

Filing taxes as a small business owner can feel overwhelming, so we'll clarify a few questions you may have as you plan ahead:

Should I plan for quarterly tax payments? 

If your business income is steady, thinking ahead about estimated taxes can help you manage cash flow and avoid surprises at filing time

Which deductions should I track throughout the year? 

Keeping an eye on items like home office expenses, health insurance premiums, and business mileage ensures you don’t miss opportunities to reduce your tax bill

Is forming an LLC or electing S corp status right for me? 

LLCs can provide liability protection and a formal business structure, while an S corp election may offer potential tax savings for self-employment taxes

How can I make tax time easier? 

Staying organized, separating personal and business finances, and using tools like QuickBooks Self-Employed can streamline filing and help you make the most of your deductions

Sole proprietorship tax mistakes to avoid

Even though sole proprietorship taxes are generally simpler than those for other business structures, it's still easy to make mistakes. These mistakes can lead to penalties, audits, or missed deductions.

Here are some common ones to watch out for:

• Incorrectly reporting cash transactions: It's crucial to accurately track and report all income, even if you received it in cash. Failing to report cash income is a common mistake that can cause problems with the IRS.
• Misclassifying workers: If you hire help, correctly classify them as either employees or independent contractors. Misclassifying workers can lead to significant tax issues and penalties.
• Overlooking deductions: Many sole proprietors miss out on valuable deductions because they don't keep good records or don’t know all the eligible expenses. Keep detailed records of all your business expenses and stay informed about potential deductions.
• Missing estimated tax payments: If you're required to make estimated tax payments, failing to do so or paying late can result in penalties.
• Mixing personal and business expenses: Keep your personal and business finances separate. This makes it easier to track expenses, identify deductions, and avoid commingling funds, which can create legal and tax issues.
• Not keeping good records: Maintaining organized and accurate records is crucial for tax purposes. This includes receipts, invoices, bank statements, and mileage logs. Good recordkeeping makes tax preparation easier and helps you support your deductions during an audit.

To minimize errors, consider using accounting software, keeping detailed records, and consulting with a tax professional if you have complex tax situations.

Find peace of mind come tax time

Even if you plan to outgrow your sole proprietorship or hope to remain a solopreneur for a while, adhering to the IRS’ rules and guidelines is key. You’ll want to report all income to your state and the IRS.

QuickBooks Self-Employed provides freelancers with essential tools to manage their business finances, track mileage, and categorize expenses—all in one place. This simplifies tax preparation and helps maximize deductions, making tax time less stressful and more efficient.

Disclaimers *QuickBooks Live Tax, powered by TurboTax, is an integrated service available with a QuickBooks Online subscription. Additional terms, conditions and limitations apply. Pay when you file.

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